Wolf on Wall Street

Tuesday, November 8, 2011

Rally off Monday Mid-day Low Cut in Half

The Dow 30 has cut the rally in half at the 50% retracement, I would consider using any strength, especially around the 25% retracement as a chance to phase in to some positions.

The IWM is closer to a 70% retracement

The QQQ have hit the 50% line

A has the S&P-500, again, I would watch for any bounce and watch for it to start to rollover to possibly add or initiate some positions, again not swinging for the fence, but it looks to be a decent risk area.

Entering/Adding Positions

This looks like a pretty low risk/high probability area to either enter positions or add to positions, I would still try to maintain some dry powder and not swing for the fences as of yet.

Here's why...

Just based on technical levels, the test and failure of resistance at the major Head and Shoulders neckline this morning is a negative market event, it also gives you a nearby stop to lessen any risk from a risk management position.

Here's the daily chart and as with 90% (or more) of initially broken tops, there's almost always a retest of the neckline, that failed thus far this morning.

Here's the larger top pattern.

As I mentioned, the probabilities look good here and the risk is not too bad as a stop can be put above today's highs.

I still prefer a directional trade using rather then stock picking at this time, once a trend establishes, then we will see more sector rotation and stock picking may outperform, but for now, I prefer the broad coverage of several inverse ETFs.

Small Caps Taking the Brunt

The IWM was trading up .91% as of the open, it's now given back all of those gains and is down around 1.06% now, losing nearly 2% from the open.

Since I captured this screen shot it's down to $73.57

ES vs S&P-500

ES (S&P E-Mini futures) are trading at a noticeable discount compared to the S&P-500 as well as making lower highs, lower lows. ES traded below the 9:30 open well before the S&P

SP-500 trading below the 9:30 open

It seems ES is leading the S&P as would usually be the case.

Italian 10 year breaking to new lows

Yesterday the ECB stepped in to support the Italian 10 year 5 times to no avail, now it looks as if it will make a new low and a new record high yield.

For context a country that shows no growth such as Italy is considered to have a problem when yields cross 2.5% or so, the Italian yield may move close to 7% today if there is no ECB intervention. The 6% mark is where the decline has accelerated in the case of Greece, Portugal and Ireland.

Flags and Pennants

Here's how the Bear Flags and Pennants look

DIA Bear Flag Resistance

DIA 5 min

IWM bear pennant resistance

IWM 5 min

QQQ bear flag and local resistance

QQQ 15 min

SPY just tipped through neckline resistance before dropping back down.

SPY 30 min

Italian Budget Vote

Today was 1 of two possible votes in which Berlusconi could have been forced out of his position. There has been a rumor floated, it was on Briefing.com yesterday (I am not an affiliate for Briefing.com, but if you want timely, unbiased news before CNBC gets it, their paid service is well worth the money) that the opposition may abstain from the vote, that's exactly what happened and gave Berlusconi a victory in the budget vote. The vote came in at 308 of 630 seats which means the speculation is over, Silvio has lost his majority.

You saw the Euro reaction and now the market reaction, the problem is uncertainty, a Berlusconi defeat really wouldn't have changed much fundamentally, but it would have closed that chapter and that uncertainty. If the market hates anything, it's uncertainty, thus the phrase, "When the missiles fly, it's time to buy"; it's not because the market loves war, but the uncertainty over whether a war will start or not has been resolved.

The Italian Vote Is In

This is how the Euro has reacted...

Details are coming...

PEIX Follow Up

On 11/3 I posted PEIX and the long term strength and recommended you put it on your watchlist for a pullback to the 10-day moving average. We're just about there, I wouldn't jump in yet, but we may be getting very close to an excellent risk:reward /high probability long trade.

On a daily basis, this is a huge drop and looks very ugly, but on a longer term view, it looks pretty good.

Here's the longer term view.

I would just wait for the stock to steady around the 10-day m.a.

ES, DIA, QQQ

ES WARNED FIRST, NOW THE DIA AND QQQ ARE WARNING.

DIA

QQQ

3C Quick Start

Many of the charts you see here at WOWS are my proprietary indicator 3C which reveals underlying institutional money movements and often contradicts price. To understand the annotations made on charts, you must first understand that 3C has no numerical value, it is a pure divergence indicator. Positive divergences represent accumulation by smart money, negative divergences represent distribution by smart money and when 3C trades with price, that is trend confirmation.

The chart annotation system is simple; white arrows represent relative positive divergences, red arrows represent relative negative divergences and green arrows represent trend confirmation. When 3C is in a white or red box, that represents a leading positive or negative divergence, leading divergences are the most powerful.

We analyse 3C in multiple timeframes, the longer the timeframe the stronger the accumulation. 1-2 min timeframes represent intraday moves, a 5 min timeframe can represent a day or two and 15 min timeframes average trends of a swing trade nature. 30 and 60 min charts can move the market for a month or more and daily charts can be over a year.

You'll get use to seeing the charts and understanding how the multiple timeframe analysis works and works well.

Welcome to Wolf on Wall Street.

The trades featured here are meant to maximize returns with the least risk and highest probabilities. Unless otherwise mentioned, all trades are meant to be executed at market. I prefer long-term trending trades which perform well in rising markets, but really stand out in declining markets. However, we get occasional one day gifts 30,40,60% 1-day gains. I'd urge you to consider taking some or all off the table in such cases, the markets don't give gifts like that often or for very long. Most of the returns that make the system outperform so well come in short-entry trades. If you are opposed to short trades, this is not the system for you, unless you are ok with buying an inverse ETF. If you would like more information about the truth about shorting stocks, just email me.

Risk management. I recommend a specific and consistent risk management approach to all positions. In most cases we try for 2% risk money (2% of portfolio) unless such a position size exceeds 15-20% of overall portfolio in actual position size. Each trader is different and each has a different allowance of open trades. I like to keep the overall money in the trade around 10-15% of portfolio per position in case of gaps against you. Stops are generally executed at the end of day and I personally never place a stop order, all my stops are mental; remember, the middle man gets to see everyone's cards. When you are not in tune with the market or opportunities just aren't that spectacular, I take my risk per position down to 1% or even half a percent of portfolio value.

Each trader is different and must determine their own level of comfort with risk. I do have a channel stop which I provide to TeleChart/StockFinder users for automated stops, I appreciate you using my links to sign up if you do. The Trend Channel catches trends and works well as it automatically adjusts for each stock's volatility. Arbitrary exits based on nervousness about the markets WILL decrease the portfolio performance dramatically. This system will not ever get you in at market bottoms or tops. The recent 1 year performance against the Russell 2k buy and hold had the system beating it by 3:1. Ultimately it is up to you as to how you proceed, but I'm always available to help you determine what might work best for you.

I do use other scans and systems when market conditions warrant their use and may change strategy with market conditions.

The MOST IMPORTANT tool you have to bring you long term success is RISK MANAGEMENT. There are plenty of articles linked at Trade-Guild.net on Risk Management. We can be wrong 75% of the time and still outperform the market with solid, consistent risk management.

Position Sizing

The position sizes noted in the positions @ 2% risk of portfolio are based on a $20,000 portfolio-adjust as needed. Due to tight stops, there is the possibility, even probability that one position could take up the entire portfolio. You need to decide how many positions you want to trade and reduce the position size according to that. For instance, if you want to trade 5 positions in a $20,000 portfolio, no one position should be valued at more than $4,000-not risk money or 2% rule, but share price entry x shares.