Tuesday, September 02, 2014
From our member's site,
How we use 3C to confirm high probability trades...
For those of you using 3C, I try to give you real world examples. Last week I thought TLT would be a great trade opportunity, today we are 2/3rds of the way to confirming that trade and entering it, but this isn't about TLT, it's about using probabilities and 3C to set up high probability, low risk trades.
For example, last week (Wednesday) I posted negative divergences in TLT and suspected it would be coming down soon. I said I didn't particularly like the idea of TLT short (TBT long-2x short TLT) although you could have taken that position. Wherever you first see a pretty serious 3C divegrence...
Using last Wednesday's chart from the post, TLT / Treasuries we can see it's around the $117.50 level, even though the divegrence may guild as this one did over the next couple of days, price will almost always surpass the area you first saw the divegrence once there's a reversal such as we saw today in TLT, meaning the probabilities of TLT pulling back to at least $117.50 are very high.
Today TLT pulled back to $116.75 so it already surpassed the target concept just mentioned above. While you could have entered TBT to rise TLT down, it's trading against the highest probabilities.
From today's post, TLT Update I posted these charts...
The daily positive divergence from last year is a large, strong base and the daily chart is showing very strong underlying flow so this is the chart of highest probabilities and since it's still in line and not negative, it's still the highest probabilities which we want to trade with.
Just to make sure nothing has changed, the 60 min chart also shows 3C in line with price, thus the highest probabilities are for TLT to resolve to the upside.
Thus we look for a shorter term (smaller underlying flow) divergence like we saw last week.
This 15 min negative tells us a pullback is likely, we already knew this from last week.
Confirmation is a very important concept when using 3C, so the 10 min chart tells us the same thing, a negative divegrence, a near term pullback which we already knew from last week's charts again.
Since we are in a new short term trend, we look to the fastest charts to see a change in character or in this case, accumulation since the highest probabilities are for a resumption to the uptrend.
At this point we have no position, we have no risk, we are just waiting for confirmation. The 5 min chart tells us that there's likely more downside as there's no positive divegrence there yet.
Once the intraday 1, 2, 3, nd 5 min charts start going positive, we should see a reversal process start to form, at this point we know that the pullback is being accumulated to once again make a move higher along the lines of highest probabilities which are on the daily chart, then the 4 hour, 2 hour and 1 hour chart which all agree.
We don't enter until we see the pullback is showing strong accumulation and then the concepts of a reversal process and head fake move come in to play.
We now have signals telling us the pullback has been accumulated, it's not a downside reversal. We now have strong short term probabilities confirming the pullback was just that and we have a better entry at lower prices and thus lower risk. As long as the longer term charts still tell us the probabilities are to the upside and our short term charts agree, we can now enter long, trade with probabilities at the best price possible and thus the lowest risk possible.
As for targets where this may happen, I look to our custom Trend Channel which has held the entire uptrend of 2014 and should continue to do so.
The current stop for the uptrend is $112.50. I confirm using a moving average of the trend...
The 100-day works fine for this purpose and is around the same area, $113 or so. Now we know it's probable that the pullback will end somewhere above the Trend Channel and 100-day moving average, but even if it doesn't, as long as we have strong confirmation, we still have a strong trade. The Trend Channel holding the pullback just makes the trend and trade on a pullback that much stronger.
So we don't enter any trades, we have no risk until the probabilities that we expect to see, are confirmed. At this point, we have a high probability,low risk trade with an excellent entry.
Friday, August 29, 2014
A quick look at some of our Leading Indicators from Wolf on Wall Street
I captured these just before the last post to see if I could glean any additional insights. We'll start off with leading indicators (later we'll check internals and the Daily Wrap as they are really where all of this began being so deeply oversold (worse readings than bear market readings).
First, probably the most important of the Leading Indicators and the predictable instigator and support mechanism of the market from early August, HYG.
HYG vs SPX (leading indicators will always show SPX in green, unless otherwise noted like "SPX prices inverted").
Clearly HYG wasn't supportive of the market at all, that is until the close. Look at HYG in to the close and the SPX, that's not an accident and it fits well with the The Week Ahead post which is the same thing I've thought all week. I'll show you more in a minute, just remember the SPY charts from the The Week Ahead post this afternoon.
I suspect the market is far too weak to stage a breakout, even a head fake -failed breakout without some help from the market levers. Take a look at HYG's intraday charts and remember the week ahead SPY charts...
The 1 min above and 2 and 3 min below have an intraday positive divegrence just like the SPY, note the move up in HYG at the close, also like the SPX in to the close.
2 min HYG positive today
3 min HYG positive today.
I suspect if this were going to be a longer/stronger divegrence, it wouldn't have started upward toward the close, but rather stayed in the area and continue to accumulate.
As I said with the SPY in the Week Ahead, the roof on the move is at the 5 min chart which is not positive, but leading negative, that's the same situation for HYG so it looks like it's clearly being used as a lever to help push the market to our head fake move and looking at the close, I'm guessing it will be right off the bat Tuesday morning.
Earlier I showed you the trouble HYG is in, HYG As A Leading Indicator, I suspect HYG will give out first and lead the market lower in to stage 4, I just don't think anyone will be wanting to hold HY credit so close to a decline.
This is the August rally and even with today's move, HYG is still very much in a reversal process, the 9th day of lateral trade, this is likely one of the main reasons the price gains in the overall market have slowed to almost nothing and the averages are headed sideways in their own reversal process.
Longer term on a 4 hour chart, HYG gave out back in May, it gave out again in June/July, the next leg down should be substantial and remember, credit leads equities.
Here I have inverted the SPX's prices so you can see what the normal correlation would be between the VIX (spot) and the SPX, normally they'd move almost exactly together, but this week as we expected to be in the reversal process with deeper distribution, the VIX has outperformed the SPX which suggests protection is being bid.
In fact of all of the market correlated assets, the VIX has one of the clearest, cleanest reversal processes.
The red box is the market base from 8/1-8/8.
Here VIX Futures (VXX) are also outperforming the SPX (also prices inverted), especially toward the later part of the week. We often see this when the correlation is broken because there's real demand and a real bid for protection.
I like to use short term yields as a leading indicator because short term the market is drawn to them like a magnet. You can see yields have been supportive of the move (short term), but have broken away as the market has turned lateral, the topping/reversal process.
This is a longer term look at the same with the August rally at the last yellow box on the right, you see short term reversion to the mean, right now Yields are pretty severely dislocated and will be exerting pressure on the market to the downside.
Earlier in the week I posted TLT (20+ year treasuries) looked like they might pullback, TLT / Treasuries. The divegrence is still there and we saw some late day selling in them, remember they are part of the SPY arbitrage and them moving down helps the market move up with two other assets, HYG moving up and VXX moving down, we already saw HYG at the close, now TLT. I doubt this is coincidence as weak as this market is they'll likely pull every lever.
I took a quick look at the averages and the Trend Channel, except at "A" when the Ukrainian government claimed to have destroyed an armed Russian Column that upset the market, there hasn't been a single stop and the channel has held the entire uptrend until the red arrow, that's about when prices started moving more to the side/laterally, which is exactly what the Trend Channel is designed to do, keep you in during the trend, pull you out when the trend has ended, but that doesn't mean an immediate reversal, in fact I've addressed this a couple of times this week, but it is telling us the easy gains on the upside are over.
The DIA also had the same stop at the Ukrainian news, but otherwise held the entire trend until the two red arrows, you'd stop out on the first and the trend has obviously turned lateral since.
Here's the QQQ Trend Channel and recent stop, note the change in trend from up to lateral.
In fact, the Trend Channel pulled the SPX and Dow out after 10-days of rally for a gain of +4.34% and +4.10% respectively. Over the 6 days since then until today's close, the SPX and DIA have gained exactly +0.55% and +0.35%... Not exactly worth your time or the risk is it.
For the Q's the Channel stopped out later, 14 days in to the trend with a gain of +5.63 and since then only +0.26%!
This is VWAP today on SPX futures. As mentioned this morning, it seems a Citadel algo under the direction of the NY F_E_D pushed SPX futures to new highs >$2000 which were promptly lost as VWAP was broken at B and headed to the lows of the day at "C". At "D" we have the intraday highs (until the close) which faded right after the European close back to VWAP.
Looking at the VWAP/ES trend for this move, it's pretty easy to see the change in trend.
I looked at single Currency futures, this is AUD and it looks like it's going to come down with this 30 min negative divegrence
The 30 min Euro is still in line with its downtrend, this may change if Draghi acts next week.
The $USDX also has a deep leading negative on a 60 min chart, this isn't the first time I've seen it this week.
I didn't cherry pick these, they were the ones that stood out the most. These are not short term intraday divergences, but more along the lines of short term/Swing (or a bit longer ) reversals.
Interestingly the Yen's 60 min divegrence is leading positive. Taken with the above currencies, this would suggest there's no carry trade that will come to the market's rescue, rather it looks like the carry pairs are about to see a decline which would be in line with a market decline as well.
All in all, it looks like the same concept we see about 80% of the time is going to play out again as we have maintained all week.
Not that I subscribe to any of this as I have shot down these fractal correlations and Hindenburg Omens numerous times as I feel each market is different even though I may agree with the end result, but the 1929 high was the day after Labor Day which is coming up Monday, again, just an interesting aside.
I'll have much more for you this weekend.
Have a great weekend and safe holiday.
Tuesday, August 26, 2014
This is just yesterday's $USD, GLD (gold), GDX (gold miners) and NUGT analysis from our members' site,
$USD / GLD / GDX Macro Trend Monday , August 25th 12:48 p.m.
"This morning CITI came out and let everyone know that they sold their $USD positions fearing a sharp decline after the $USD just had an incredible week (last week)...I thought this was interesting for a few reasons, 1) we saw some underlying weakness in the $USD last week and 2) we saw underlying strength in both GLD and GDX (gold miners which share a tight correlation to gold). In fact, last week we had Trade Idea (Swing) NUGT Long and the next day, Trade Management: Adding 25% to Yesterday's NUGT Long...I think what is going on here is a bit larger then the knee jerk moves on CITI's news this morning, and smart money doesn't disclose their positioning unless there's something to gain form it, whether long gold already or looking to pick up $USD at cheaper prices, whatever the case, CITI was out of the $USD before making that known to the world this morning...With gold and oil looking this way and CITI's announcement they have sold all $USD longs, it makes you wonder (as they never disclose anything that's not to their advantage unless forced to) whether they've already set up their $USD shorts and/or USO/GLD longs as commodities/precious metals typically move opposite the $USD."
With our NUGT long position on signals from late last week and a strong head fake move yesterday at the close...
We had a very strong case for our GDX/NUGT long.
This morning, Gold and miners gapped up, by the close our NUGT long was up 6.19% on the day. While we expect some bouncing around, the longer term 3C signals show us what appears to be at least a swing long trend in a 3x leveraged ETF.
Friday, August 22, 2014
Below you'll find a repost from Trade-Guild from Thursday, July 31st which originally from our members' site the same day,
Some quick excerpts from the full post below, The Market Was Flashing Red Lights, Now It's Oversold ...
"The one thing I see for sure in breadth and the S&P/Morningstar performance is this market is now, very oversold on a breadth basis, so I think out position taken up today was the right thing to do and we did it based on the signals which just happen to fit the breadth oversold condition.
We'll piggy-back that trade and when we get to a little correction there are numerous shorts (some of which we have calls in now) that will be at beautiful set-ups if you need short exposure, I think most of us have been ready for this day." July 31st Wolf on Wall Street
Other Posts and excerpts from Wolf on Wall Street...
Opening Indications August 1, 10:46 a.m. Wolf on Wall Street
"What I'm seeing so far makes sense with the degree to which the market is oversold and I never consider a market oversold based on price, but based on breadth which as you saw last night with only 24% on NYSE stocks above their 40-day moving average, down substantially from Wednesday, we are very oversold and I suspect we'll see a decent bounce.
The 3C intraday charts thus far have shown positive divergences in to weakness and there's a larger reversal process/short term base I suspect in the making so I still think we'll get a pretty decent bounce"
The 3C intraday charts thus far have shown positive divergences in to weakness and there's a larger reversal process/short term base I suspect in the making so I still think we'll get a pretty decent bounce"
Multiple Asset View August 1, 11:41 Wolf on Wall Street
"While there are a lot of charts still in line with the downside and nearly all have intermediate and long term divergences that won't be turned around, there are quite a few that are working on what looks like accumulation of lows and a broader base, I'll show you a cross section of the market (mostly the ones working toward some sort of base). I'd be very tempted to take gains in assets such as SRTY +12.65% since re-entering it last week if indeed a bounce looks probable. I'd likely put most on the sidelines and play a few select longs with either 3x leveraged ETFs or calls and then re-enter the shorts like SRTY."
Closing UVXY Long August 1, 12:55 p.m. Wolf on Wall Street
Closing FAZ Long August 1, 12:55 p.m. Wolf on Wall Street
The Week Ahead August 1, 3:08 p.m. Wolf on Wall Street
"I think the current charts show a building divergence so I may decide to move some more positions around next week, but not right now...If you look at where we are now, any upside move would be off a "V" bottom and these are just not common, especially in a situation like this in which market breadth is so massively oversold...This is the SPY 5 min chart leading positive, but it needs to build out a larger footprint... From the charts I see, I think a bounce is probably likely."
Early Indications Monday August 4th, 10:55 a.m.
Market Update-Timing Friday August 8th 3:08 p.m. Wolf on Wall Street
"There are several calls I'd like to enter or add to like XLF and IWM, there are actually quite a few stocks that look good, but for a bounce I'd rather use something that's going to represent the broad market and with some leverage (URTY or IWM calls, GFAS or XLF calls).
As I said earlier, "Don't Chase", however this bounce is now looking very strong for lift-of, something we haven't seen all week so at the same time, I don't want to miss it."
*From there, we had our base and bounce starting the next trading day.3C accumulation/base formation from 8/1-8/8.
The base and what came next, called starting July 31st as you'll see below, allowing us plenty of time to re-oder our trading positions.
Currently we believe we have several more days of largely lateral consolidative movement before the next trend.
July 31st's repost,
This post from our member's site,
shows the targets we had set two trading weeks ago on 8/11 for this market bounce as well as what we see moving forward...
This is a little bit of a tricky area, especially for short term traders or day traders as the dominant trend will be lateral/sideways which is usually pretty choppy and can create a meat grinder, just imagine a rectangle, fairly tight and price bouncing inside it.
For longer term trades which is what we have been most interested in with this bounce, entries are going to start popping up, the best will typically be on upside volatility. On an options expiration Friday (every Friday w/ weeklies), price generally un pins from the max-pain area around 2 p.m.
The main levers are failing, for this bounce HYG was the main lever set in motion August first and led the market the entire time the base was being constructed (q week) as well as almost through the entire bounce. If we look at it from a stock cycle/stages, we're in stage 3 (top/distribution) now.
This is the targets that were published on the first day of the bounce, August 11th, TWO TRADING WEEKS AGO IN Daily Wrap...
The first chart was a rough guess of what the IWM would look like and where there were two points of action, the first being a slight pullback where longs for a piggy back trade could be entered and the second was the upside pivot and more important short entry.
This is the actual chart from that post on 8/11 and commentary...
"Here's the base we expected to form just a little over a week ago, the 3C divergences during this base have been posted numerous times and there's one above (QQQ 10 min). We started a move up today which I expected to see early weakness as of Friday's "Week Ahead" and "Daily Wrap" which started today with a 50% retracement from intraday highs. at #1 we have the expected very near term pullback and reversal process, this is where I'd enter any call positions (speculative) or swing trades (which I prefer using a market average like the IWM with leverage like URTY - 3x long IWM). While there will undoubtedly be smaller/short term surprises along the way, the general idea is for the base to send the market higher along the lines of a swing trade. At #2 we have the most important part of the analysis which would be the start of the reversal process back to the downside, THIS IS WHERE I'D WANT TO CLEAN UP LONG POSITIONS AND START ENTERING ANY REMAINING SHORT POSITIONS"
This is what the IWM actually did...
The above was posted at the white arrow, there's a small pullback which was to be used for any long trade entries. And the second pivot where shorts would be entered, was just above the white trendline if you look at the chart above from 8/11.
This is the SPX chart from the same post on 8/11 with several targets from minimum to the expected upside @ "B" above the psychological level of 1950. "C" was added as the next likely stop for the next leg down.
Here's where we are.
One of the SPX upper targets for the bounce were right in this area, as stops would likely be placed (short stops) right about where the SPX broke below the bearish Ascending Wedge, so a move to that level was reasonable, a move back inside the wedge would be difficult as the trendlines were extended.
This is the SPY 60 min trend, the only disruption was the Ukraine fabrication of a Russian Armored column being destroyed last Friday (red arrow). However note the turn to the right and lateral reversal process expected this week after about two more days of upside from Friday's The Week Ahead...
"Today really skewed a lot of things (*Ukraine disinformation of Russian convoy destroyed*), but just going from the trend prior to today, it wouldn't surprise me if we were very near the end of this bounce, maybe a day or two more (This week*), but I suspect we'll be seeing a lot more lateral (sideways) trade next week, a reversal process."
We got about 3 days , but I believe the reversal process started Monday and as you can see the trend lines are now flat the last two days.
Here's another way of looking at it on the QQQ, the 10-bar moving average has Rate of Change (orange) applied to it which has clearly turned down.
From a daily ES point of view, this has been the lowest volume rally of the year with the last two days setting new record low volume for SPX futures exclusive of holidays.
VWAP may look different to you for the simple fact it's no longer trending up, but sideways.
HYG has been the lever for this bounce, it's certainly not demand judging by volume. HYG led since the base started on 8/1 through 8/8 and led through most of the rally /bounce until a few days ago when they reverted to each other, now HYG's relative performance is lagging badly.
HYG intraday vs the SPX
HYG's longer term 30 min chart positive at the lows/accumulation and negative now/distribution.
The 15 min chart with a relative and then leading negative divegrence.
And the 5 min chart.
The 2 min chart's trend is a great visual of when and where underlying trade moved from accumulation to in line to distribution.
As mentioned several days this week, VIX futures are seeing accumulation, I inverted the SPX price (green) so you can see the "normal" correlation, VXX is definitely outperforming the SPX...DEMAND.
The Flight to Safety TLT/Treasuries (20+ year) are also outperforming, remember the accumulation on the F_O_M_C minutes knee jerk dip.
Our pro sentiment leading indicator had been in line with the SPX through almost the entire bounce and started going negative a couple of days ago and continues.
This is TICK, note the strong move to -1500 earlier today and a flat trend now.
I would normally think we'd have about 3 more days or reversal process, but because this move was so straight-line with few pullbacks, it's probable that the reversal process will be faster/tighter than normal, the IWM may be the exception.
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