Futures Market Summary

My speculation re: market direction was dead on. I called my bias as "long" when the YM was up 22 ticks - we ended up 134 ticks. Could not have been more right, but it wasn't a clean run by any stretch of the imagination. You could tell there was a battle every step of the way, herky jerky every step of the way. The past several days has seen essentially two daily trends: (1) down in the morning, and (2) up in the afternoon. Good thing about today was that it was a Friday that saw buying in the close. The big battle of the day was 13,839 on the YM, which got tested on 4 pushes up in the afternoon session. Fairly sizable bars up into that level and sizable bar pushes out of that level. The breakout at the end of the day saw a move up and out of that area - good news for longs. Another "tell" for the day was the number of times we came down to the 2 min, 200 ema for tests - exactly zero.

I began the day testing the currency waters again trading the loonie and got pegged for 16 pips (equal to -$200 per one contract position). The four morning momentum positions I took chopped me up and spit me up for -61 ticks. So I stood aside and waited, and waited, and waited. The trend break came and I went for the trend reversal. I was able to pull in enough ticks to erase my draw down and give me a nice profit for the day.

BTW, look at that wedge action between the uptrend and doldrums high and the resulting pop out of that zone. One last "tell" was that we usually see a retest of the Doldrums high once we get the breakout; however there was no "kissing" today.

Below is my summary for the day:

YM: +72 ticks (equal to +$360 per one contract position)

ER2: +67 ticks (equal to +$670 per one contract position)

CD: -16 ticks (equal to -$200 per one contract position)

24-Hour Range: 164 ticks

Regular Session Range: 124 ticks

Equity Markets - The Battle is On

We have run smack dab into the 34 ema on the daily chart, which is the line in the sand for this bounce off of last Friday's tank. We have pierced it once today and have fallen back to lower highs and lower lows since the open. The high is the 200 ema on the 30, 60, and 120 charts, so this is a formidable opponent for longs. With that said, My 30-min chart has a bull flag right up to the 200 ema, my 60 min chart has momentum long kicking in, and my 120 chart is breaking above the range it formed at the 200 ema level. This explains the struggle we have for today. My stocks are also showing fairly good support for the market right now except for IOM (fucker). Crude is coming down from its high, but is still above $91. Yen is above the flat line. Gold is off the charts. All I can say is that we are sitting at very significant overhead resistance, but there are some strong looking stocks out there. Let's see what happens if the morning pattern of lower low/lower high is broken. It is getting shallower and shaller as I type. Net bias is long from here (YM currently up 22 ticks).

Futures Market Summary

I started off early this morning playing a little currency futures before the market opened. Testing the waters with the Swiss Franc I was able to scratch out 30 ticks (equal to +$300 per one contract position). I then turned my attention to the Canadian Dollar (yeah the same one that ripped me a new ass the other day). I pulled in 21 ticks (equal to +$262.50 per one contract position) playing a momentum reversal set up. Both of these currency trades were "clean" and straightforward. I then turned my attention to the Index futures off the open and noticed a sense of heightened stress. I then figured it out. I was trading the currencies off of the 30-minute charts, while trading the indices off of 2,5, and 15 minute charts. Not just faster timeframes, but also 3 times the number of charts.

I was searching for my footing coming off of those currency trades and going to the index futures. Out of the gate I made a mistake (-4 YM ticks). I then went into a non-momentum trade (actually a momentum reversal trade) and ended -15 tick on the ER2. I should have known what was next - two impulse trades. I had the classic lead in with the mistake and a non-momentum trade that did not work out. I should have gotten up and walked around; however, that was not in the cards. The result was -20 YM ticks and -8 ZG ticks. It was at this time that I figured out the direction I was going, stopped and got away until the end of the Doldrums.

All day I was faced with a momentum indicator that was certainly showing me momentum, but the movement today didn't slow down enough for one of my key "trigger" indicators to set up. Therefore, no graceful entries today on the momentum side. With the increased volatility, I am cutting back on the number of contracts I trade with each set up. I am also trying to give the trades a bit more room, as well as staying focused on reversal patterns. It may be too much, but the end result today was a small profit.

The chart below show the action. Doldrums High and Low played a significant role in the afternoon session. As can be seen, price reversed 6 times off the doldrums high and low. Need to keep a sharp eye out for those reversals. You can also see that the Monday and Tuesday HVP served as resting points as well. I will start putting the globex high and low on these charts as well. What is key about these key locations is watching out for trend changes when price hits and stalls there. For example, the downturn from the globex high tended to the Globex low and Tuesday HVP. At this location you need to ask yourself the question "is this where it stops and reverses?", or does it continue. A simple trendline answers the question. You can see the sideways consolidation along the Globex Low and Tuesday HVP, but it doesn't violate the trendline. the volatility around the Monday HVP and Doldrums low created the break and then we were off to retrace the downturn.



The summary for the day is below:

Swiss franc: +30 ticks (equal to +$30 per one contract position)
Canadian Dollar: +21 ticks (equal to +$262.50 per one contract position)
YM: +16 ticks (equal to +$80 per one contract position)
ER2: -23 ticks (equal to -$230 per one contract position)

24-Hour Range: 194 ticks
Regular Session Range: 194 ticks

Monday HVP: 13613
Tuesday HVP: 13675
Wednesday HVP: 13560
Thursday HVP: 13685

No open gap from today.

Hedge - YM Short 13,684

Based on my thesis presented in my October 20th post, I am putting on a hedge by shorting the YM on a swing basis. The timing is consistent with the move up to the 34 EMA, which is the "kiss-n-fall" that I expected. I am looking for price to move to the 200 ema (at least) and will be peeling off at that level. This level is on the cash chart - not the futures chart, so I will activate audibles to alert me when we get to this level. My stop level intraday is set at 13,915 on the cash chart, while my target is 13,159 on the cash chart. I will exit the position if bar close is below the 13,915 level, but above the 34ema level. The ultimate reward-to-risk ratio is 1.8:1.

I am not taking this position because I am a short selling asshole. I am taking this position because I have a shitload of long equities that I need to protect. So, I will be more than happy to be stopped out of this hedge position. I consider it insurance.

CYD - Bought 1,000 @ $12.75

Picked up final position in CYD when it jumped 5% out of gate. My rule is to add as the price goes up 2%. So, I now have 100% position and am up 13% on holdings. I believe new found interest comes from CYD improving corporate goverernence, PR , as well as China's >11% gdp confirmed last night. All supportive of a Chinese engine company like CYD.

NFX - sold 300 @$51.77

Was pushing down and thought that i needed to get out while I still had a profit (4%) given my original thought re: earnings. Seems that others are beginning to see it the same way and are starting to sell it down. Golden opportunity for me to get out with a profit. Thank you.

NFX - sold 300 @$52.19

No reaction to earnings this morning, which was a golden opportunity to sell down and pocket profit. Due to flat reaction, I am holding 1/2 position.

NFX - Big Miss

Let's hope the nice 3% push up today ahead of earnings gives me enough buffer to get the hell out in the morning without taking it too much in the shorts. I have a 4.19% cushion to deal with the miss that NFX came in with. Revenues were way below estimates and EPS was a miss considering the unrealized non-hedge derivative costs - WTF? What a mess. Needless to say, I am out of this stock in the morning. I have held on way too long and have no technical or (now) fundamental reason to stay with it.

CYD - Star Performer (+18%)

"Wow" - that's all I can say about it. I was on the verge of slashing its tires and pushing it down the hill, then it unexpectedly kicks into gear. Why? Well, the only news that I have seen is that the company appointed a new CFO (Ho Tuck Chuen) and the CEO laid out this quote:

"We believe Mr. Ho's expertise and experience will enhance China Yuchai's financial planning and reporting, strengthen corporate governance and improve investor communications. China Yuchai's rapid growth in the Chinese market created the need for improved financial management. Our Board decided to bring in additional resources to help us capture the opportunities for fast growth in China. China Yuchai aims to further penetrate the growing Chinese automotive and construction markets, maintain market leadership and maximize shareholder value."

The last sentence is key since we all know the growth potential in China. To help the cause, CYD retained The Global Consulting Group, which is a "leading New York based strategic communications consulting firm to be its investor relations counsel." The CEO said the following about Global Consulting:

"The Global Consulting Group was selected to represent China Yuchai after a thorough review of numerous candidates," said Mr. Teo. "The Global Consulting Group's strong track record in the automotive industry, its keen understanding of China's market, and its ability to help enhance shareholder value for its clients were the key reasons we selected them to assist us in our investor relations efforts. We believe that The Global Consulting Group's effective communications programs and reputation of developing long-term relationships with the investment community will enable China Yuchai to increase investor awareness and visibility."

Let's move to the chart:

The weekly chart clearly shows an inverted head and shoulders pattern with price moving right up to the neckline. Volume has been a bit more consistent over the past 6 weeks. We will be looking for high volume if and when the neckline is broken. This will validate the head and shoulders pattern.

I picked up another 1,000 shares today when my profit cost basis was 2% above my entry. I now own 2/3 position on CYD and will look to add up on the next 2% increase.

Futures Market Wrap

I allowed myself to be knocked from my discipline today. It would take a long time to explain all of the trades (impulse and otherwise) that I made today. Suffice it to say that I walked away with +24 ER2 ticks and +20 YM ticks. I also played around a bit with the JY in the early hours and ended up breaking even.

Conducting a review of my "AlvariII" momentum indicator reveals that I only had one valid signal today. It triggered long right after the open (see Signal 1 on the chart). Although it doesn't look like it, I was able to get Targets 1 and 2 before I was stopped at break even on Target 3. The only other valid signal popped just after 11 am, but we were in the doldrums chop zone when it fired, so I did not take it.

I tripped myself up when my AlvariII indicator did not trigger on the big down push or up push. That's where I fell off the wagon and resorted to impulse trading. Needless to say, I was disappointed with my approach today regardless of the outcome. I need to sit back and understand that there are going to be those days when the market moves and I am left behind. This is especially the case when properly using trade indicators. Sometimes they just don't trigger.

One of my non AlvariII trades is a fade of the bottom for the day. In my head, I kept hearing the trading pundits on the floor of the exchange answer the inevitable afternoon question: "Um, can you please explain why the reversal today?" To which the trader states: "Well, we went down and tested the bottom, the bottom held, so we rallied". That simple - nothing more, nothing less. I kept hearing that in my head as we headed to the bottom on the YM, but we never got there when it reversed with a vengeance. That's where I resorted to impulse trading. I saw the price action and noticed the extreme volatility and knew it was more than stop fishing, so I jumped on board.

Good outcome - bad process.

Trade results for today are below:

YM: +20 ticks (equal to +$100 per one contract position)

ER2: +24 ticks (equal to +$240 per one contract position)

24-Hour Range: 228 ticks

Regular Session Range: 213 ticks

Monday HVP: 13613

Tuesday HVP: 13675

Wednesday HVP: 13560

Alvarion - Star Performer (+5%)

Nice pop and recovery from ALVR, which is one of my top holdings for obvious reasons. The correction off of the overbought conditions is now complete and we are free to make the next move up. Earnings is scheduled for October 31st - we should get a good feel for their recent overseas contract acquisitions, as well as their future prospects. There is quite a bit of WiMax news out there and some of it focuses on the market potential for WiMax in developing countries. No one is better positioned in this arena than ALVR.

Following quote is from CSCO:"In the U.S., there are a number of choices, and it's nice to have WiMax as another choice," he said. "But there are some places in the emerging markets where it would have been WiMax or nothing."Larry Vang

WiMax's popularity is growing as Internet service providers look for ways to connect more people, particularly in developing countries.

Last week, the U.N. telecommunications agency, the International Telecommunication Union, added WiMax to a global standard for mobile devices, signaling that airwaves designated for technologies in the standard known as IMT-2000 can now be used for networks based on WiMax.

Information on ALVR attached:http://www.alvarion.com/

Futures - Market Summary

We got 3 solid momentum signals today. Solid signals occurred where the 2, 5, and 15 minute charts lined up and agreed with each other. A mistake I made on Signal #1 was that I held and followed the 15 minute signal on both my ER2 and YM plays instead of liquidating positions based on 2 or 5 minute reversal or attainment of profit target - I just got plain greedy. The result is that I rode the move up off the lows and didn't get out until I had a loss.
















Prior to entering Signal 1, I jumped on a two minute signal short where there was no confirmation from the 5 or 15 minute charts. I sustained minimal losses. Following this loss, I sat on my hands and waited for the Regular Session Range to exceed 50 ticks. After a couple of head fakes, the move came and triggered Signal 1.

The bounce off of #1 came with a 2 minute momentum reversal to long, but the 5 and 15 minute momentum indicator did not confirm. We then entered the Doldrums chop zone where no trades were entered. Notice how the Doldrums low was exactly the same level as Monday's HVP.

Following the chop zone, we had a strong move up out of the Doldrums Range, which triggered Signal 2 and allowed me to capture long profits on both the YM and ER2. The move down from Signal 2 did not trigger any short signal, so I sat on my hands once again.

I, unfortunately then needed to leave and was not here for Signal 3. Even though the signal triggered at 12:30 (which is a time for me to walk away from signals), Signal 3 was a wonderful trigger on both the ER2 and the YM. There were confirmations on all time ranges.

The great thing about today, with the exception of the CD trade before the market open (yes, I got stopped out - whaddya think?), is that I took only set ups. Now, I did make a mistake to not take profits from Signal 1, but I took absolutely no impulse trades.

My end of day trading summary is below:

YM: +2 ticks (equal to +$10 per one contract position)
ER2: +24 ticks (equal to +$240 per one contract position)

It is a moot point, but my results would have been as follows if I did not make the 15 minute mistake this morning:

YM: +61 ticks (equal to +$305 per one contract position)
ER2: +70 ticks (equal to +$700 per one contract position)

FWIW - it's important to know what the hell you are doing once you are in a trade and to not start changing exit rules once you are in. Go with the goddamn trading plan - nothing else.

24 Hour Range: 143
Regular Session Range: 143

See chart above for Monday and Tuesday HVP

The chart below shows the HVP for Monday and Tuesday

Good Process - So So Results

MVIS - purchased 4000 shares $4.44

Picked up another 1/4 position due to a 2% increase in price. Now hold 1/2 position.

Bought 4000 MVIS @ $4.27

Have been in and out of this pain in the ass over the past year. I am re-establishing a 1/4 position using some of the cash I generated with the sale of the deadwood on Monday. They signed on with an undisclosed Asian electronics manufacturer to integrate their PicoP display into mobile phones and other devices. The information can be found in the link below:

http://biz.yahoo.com/ap/071023/microvision_joint_venture.html?.v=1

Stock was up over 13% in pre-market, but a fade of the open has taken it back to +3% where it stabilized. Downside for this stock, now that this news is out, is severely limited even though there is speculation that warrant holder pressure is currently keeping stock price down.

MCRI Buy Order 400 Shares

I am establishing a 1/3rd position in Monarch Casino and Resort. This company runs the Atlantis Casino and Resort in downtown Reno Nevada. But the reason I like it is its strong fundamentals and the fact that it is strategically located across the street from the Convention Center and has a built sky bridge connecting the casino to 16 acres of land that has yet to be developed. The company has a debt-to-equity ratio of zero, has net income that exceeds the S&P within their industry group, and the company has increased their earnings per share by over 40% in their most recently reported quarter. This company is in the Consumer Discretionary industry, which has come under pressure this year. However, MCRI, like DIS, has rebounded nicely since the July downturn. I feel that this stock, with DIS, allows me to be well positioned when the consumer shows during holiday season that it is not dead. This stock also gives me a gaming replacement for LACO, which I am downsizing from my portfolio.

Canadian Dollar

I missed the BIG correction in the CD last night, but I will not walk away from this one given that the correction off the 3-Headed Monster 200% extension is far from over. As I called out this morning when I realized I slept through huge potential profits, I will wait for a bounce up to test the 34 ema on the 120 minute chart and then I will go short with two positions. I will be looking to peel one position off at the 120 minute 34 ema and the second off at the daily 34 ema level. The CD is getting hit with the triple whammy: (1) falling crude, (2) falling gold, and (3) a dollar that is just plain tired of falling.....for the time being. This time, I am going to have an audio alert on so loud it will make the dogs down the street bark wildly into the night. I am not missing this opportunity.

Below are the daily and 120 minute charts:

Disney

I will be picking up a 1/3rd position on Disney in the morning. Earnings are coming out on November 8th and I want to be positioned ahead of those numbers. All fundamentals on Disney are solid, save debt, which is a bit high. However, with the Olympics coming up, as well as the elections, I see the potential upside on their Media segment to benefit greatly in the next year. The stock has done nothing for the past year. The swing low is 10% below my initial entry, so the risk is far worth the potential reward on this one. Disney is a Consumer Discretionary stock, and we all know that this sector has not been doing very well of late (since June of this year). The XLY fell 12% from its open on July 6th to the close on August 16th. Disney fell half that (6%) during the same period. From the July 6th high, Consumer Discretionaries (as measured by the XLY) has fallen 9%, while Disney has INCREASED fractionally during the same period. Technically speaking, the bullish reversal bar today off the 200-ema and the reverse head and shoulders on the daily and weekly charts just solidifes my desire to have a piece of this company at this time. I held DIS some time ago when they purchased Pixar and Steve Jobs joined the Board. My hope was that the synergistic effects of jobs-pixar-apple-disney would create and outstanding investment opportunity. Apple's portion of the equation far exceeded my expectations, but I cut DIS loose at about this level when it was just churning. Now is the time to give it a go one more time.

Futures - Market Summary

The 100 tick range on the Doldrums and a failure of the doldrums bullishness to continue kept me out of momentum trades (since my last post). However, I did catch a bounce off the 50%-61.8% Fib Zone (aka, Fib Zone). This helped to cut back on the chop losses that I sustained at the top of the doldrums range. Below is the 5-min chart of the day. You can clearly see the 100 point run up during the doldrums, but we had only one bar clear that zone. You can also see the the rejection that resulted. The bar on the right side of the chart was in response to AAPL earnings (glad I held onto a partial position - great news on earnings). The bounce off the Fib Zone had the elements that I look for most - two areas of support: (1) Fib Zone, and (2) 200 ema. The only disappointment was seeing the 100 point pop during doldrums. I am not a doldrums trader due to false signals and choppiness that usually happens. Today was a big exception.





Futures Trading Results are below:

YM: -56 ticks (equal to -$280 per one contract position)
ER2: +25 ticks (equal to +$250 per one contract position)

HVP
YM: 13,612
ER2: 803

24-Hour Range: 225 ticks
Regular Session Range: 186 ticks

Doldrums Range

I was so focused on following trade triggers and avoiding impulse trades that I failed to adhere to the one basic rule coming out of the doldrums, which is to not trade unless and until the doldrums range is fucking cleared. There was a battle going on after the doldrums closed between those that wanted to push out of the range and those that didn't. This chop created several signals both long and short that resulted in me getting a bit chopped. I believe that I need to simplify my charts a bit to ensure that I do not miss any of my rules when entering trades. I am happy to say that none of the trades I entered were "impulse" trades and that I got up and walked around when I took small loses.

A quote from "Charles" has been on my mind lately:

"Small losses can be easily recovered in the next few trades. Large losses can be psychologically damaging that take a long time, if ever, to overcome."

So obvious, but how often I forget it when I am in the zone.....or just zoned.

We remain in the doldums chop zone. Regardless of set-ups, I will take no positions unless and until we clear the doldrums range.

Futures - Doldrums Thought

Futures making nice upward headway during the doldrums. Overhead resistance is at 13672, which is the 50% retracement line for the big move down. Also 13675 is the 200 ema on the 15 minute chart. Given that this move happened during the doldrums and we have two different time periods with overhead resistance in essentially the same location, I will be looking to short at these levels if my signals line up. I will test the zone with 1/3rd position given my rules allow for the fade of the 50-61.8% zone.

Futures - Morning Session Roundup

I took two YM trades and one ER2 trade this morning for a net of +3 ticks and +30 ticks, respectively. The two minute chart was not showing any momentum pops at the outset due to the fluctuating nature of the market. My indicators look for a slowing period followed by a momentum burst. So, I turned my attention to the 5 min charts which did have a momentum pop to the upside before the market opened. Following my rules, I enter a long position, but entered with only 1/3rd position due to lack of 15 min YT and given that it was pre-regular session action. The Momentum indicator switched to neutral after about 1/2 hour, so I exited the 1/3rd position with -17 ticks (equal to -$85 per one contract position). After the open, I received another 5 minute momentum pop followed by a 15 minute momentum pop on the YM. Going long 1/3rd position for each, I was able to bag +20 ticks (equal to +$100 per one contract position). Net on the YM was +3 ticks. I also received a 5 min momentum pop long on the ER2,, which I rode for $300. Given the volatility of the past couple of sessions, I used a trailing stop on that play.

Upset of the day is the CD. I called out the need for a correction after a 3-Headed Monster appeared over the past couple of trading sessions. It was extremely bought, but I thought that a graceful entry would be offered - how wrong I was. Nice 1.46% pullback (151 ticks - equal to +$1,510 per one contract position), but alas I was not there. A missed opportunity? Yes. But I felt ok with that given I was following my rules. I now await a pullback to the 34 EMA for a short entry.

Morning summary is as follows:

YM: +3 ticks (equal to +$15 per one contract position)
ER2: +30 ticks (equal to +$300 per one contract position)

Regular Session Range: 104 ticks
24-Hour Session Range: 146 ticks

Morning HVP: 13,475

ER2 Long

Went long 1 position @ 802.60 based on long signal from 15 min trend indicator.

Update 1: Market made a quick move in long direction. Moved stop to 805.60 +30 ticks.

Update 2: Stop hit, out at +30 ticks (Equal to +$300 per one contract position)

Equities Update

I followed through with thinning out some deadwood and adding to some strength. The following is my list of trades today:

APA: Bought 100 @ $92.07

LACO: Sold 1,000 @ $8.84

BRK.B: Bought 5 @ $4,205.90

CEPH: Sold 200 @ $70.43

AAPL: Sold 100 @ $170.15

YM: Second Morning Trade

I got back in with 1/3rd position on YM due to momentum long signal on 5-min chart. Set stop at -20 ticks and target at +20 ticks. While in trade, 15-min YT and momentum indicator went long, so I added 1/3rd position.

Contract 1: 13508 Entry, 13528 Target, 13588 Stop
Contract 2: 13522 Entry, Open Target (based on momo indicator), Stop based on momo indicator

We got the push up and I got my first target +20 ticks. Still in Contract 2. Two min momo indicator just went neutral, but 5 and 15 min are both long.


Regular Session Range: 94 Ticks
Running cumulative ticks for day: +3 ticks.

Update 1: Set a stop at BE for Contract 2.
Update 2: Stop on Contract 2 hit. Out at BE

Dow Futures

My 5-minute momentum indicator just went long for the YM futures. With oil down over 1.50 and gold correcting big time, I am going to put on one long position here. My down side will be 30 ticks given the volatility of the past couple of days. I will be holding until the 5 min momentum indicator tells me to exit. I will add to the position if my 15 minute indicator goes long. It is netural at this time.

Entry 13474: 1 position
Stop: 13454
Target: defined by momentum indicator.


Update 1:


Position has started to move in a positive direction. I do not have a "Yellow Tip" yet on my 15 min charts, so I will just hold with one position. I will add to that position if my momentum indicators switch to long and I get a Yellow Tip. A Yellow Tip (YT) is a cross over of the 8 ema with the 20 ema. I call it a YT because I switch the moving averages to histogram to more easily see the pattern (see below). This also allows me to easily see the 3-legs.




Update 2: Exited partial position when 5 minute indicator went back to neutral. 15 Minute YT never triggered. End result was -17 ticks (equal to -$85 per one position).

Canadian Dollar Update

The 200% Fib extension was too much for the Canadian Dollar last night. I was looking for the "kiss" of the 34 ema for Leg 3; however, I suspected that the overbought correction could come sooner than later due to its super extended nature. Leg 3 has been aborted as can be seen from the chart below. We did not have any gracefully entry for the correction. I will be looking for a pullback to the 34 ema and then will go short for a trade down to the 200ema. This break of the support line officially kicks off the daily correction, which I expect to last a few days.

Sunday Night Gold

Gold made a very strong push down tonight establishing Leg 1 of what should be a 3-leg move. I fully expect any move up to the 20ema to be the start of Leg 2. I will put on a short at this location if my 5-minute momentum indicator stays short. I will use a 15 tick stop. Target would be the lows of Leg 1.

Gold Play Update: Gold play was aborted with no entry triggered.

Sunday Night Futures Action

Futures are getting clocked tonight with Dow futures down 100 points and Russell futures down 9.5 points. Japan is shitting the pagoda (-483 points), while the yen is blowing higher. Crude is down again and gold is flat. The ability of the yen to hold these levels is very important. It is at the 61.8% level of the most recent high to low move. Blowing past this level sets in motion more carry trade selling which will be negative for the markets. For me, it's all about the carry trade - a failure of the yen to strengthen as we go through the evening means the markets continue on their slide. Crude showed us on Friday that its pullback didn't mean anything. Gold the same - it was flat on Friday and nothing from the markets. So, we need a 1-2-3 punch that has to include the Yen. Otherwise, we move to the daily 200 ema rather quickly (13150 ish level for Monday). Look for the downside to stall a bit at the 13365 level for $INDU, which is the bottom of the weekly uptrend line. However, the stall will not be for long without the Yen cooperating.

Canadian Dollar - Just Watching for Now

I have been watching the Canadian Dollar for the past week since I noticed the overbought conditions. Being powered by strong commodity prices in gold and crude, as well as the dollar melt down, the Canadian Dollar (CD) has run to significant overbought extremes on my charts. I typically see the 3-Headed Monster pop up at 161.8 extensions from the initial peak. CD is currently at 200% extensions with the monster just appearing (see below):

Jumping down to the 120 minute chats, we can see the beginning of what is the 3rd leg on the run up. I would say that it is a bit premature to look for a short term correction just yet since the breakout just started and the 34-ema has yet to be broken with a bar close below it. Price appears to be coming back to "kiss" off support as well as the 34 EMA, so I would want to wait for that break and close of the 34-ema to occur. I would also be waiting for a bar on the overbought histogram to close lower than the previous day. This way, we are assured of a 3-Headed Monster that has "set". With these lofty overbought levels, this break could happen sooner than later. I just have it on my "watch" list right now.

Equities - scaling up and getting out

As previously mentioned, I scale into positions as they exhibit the ability to move up. I try not to dollar cost average as stocks move down. I will scale into positions in 1/3rd increments or 1/4 increments. My decision on a particular stock depends on sectors, strength of sectors, time of year, and strength of stock within a particular sector. The "trigger" is based on pops created by pressure generated by sideways consolidation. I have an indicator for this, but basically it is when the bollinger bands compress and fall within the keltner channels. This occurrence is easily observed by placing both indicators on your charts and just looking for those situations on daily charts for stocks that you have filtered as "good prospects".

Once price moves up 2%, I will put on another position and will continue this process until I have a full position established. My initial stop loss after entering the first position is 25% draw down. I will cut a stock loose at that time because I was just plain wrong about it. I initially decide to enter with the understanding that momentum has hit and the price will move up, if I get a 25% draw down on my first position....well, doesn't take a genius to figure this one out. I will not add to my position if it moves down during the initial phase of ownership. My price target for adding to the position doesn't come down with the draw down. I will not add to the position unless and until we get a 2% pop above initial entry price. As price is moving up and I am adding positions, I will then target 20% for the first peeling of of a position to bank some profits. I then start employing a trailing stop of 4 x ATR of 10 periods. This was a rule I adopted from "Trend Following" by Michael W. Covel. This technique has worked very well for me in defining when a trend is done for the short term. With that said, I will jump back in with a position if my monthly trend indicator is still bullish and the weekly/daily momentum indicator turns back to bullish and the stock has not completed 3 legs of up or down moves.

I am a firm believer that stocks move in 3 pushes (or legs) before a prolonged rest or entering a significant reversal. I am not a student of Elliott Wave nor have I seriously studied it. My 3 leg technique evolved from use of my divergence indicator where I observed strong corrections following 3 divergent heads on the indicator (see figure below):



Overbought conditions can stay overbought for a long time, but I have very rarely ever seen it create 4-heads. The 3-heads means that we had 3 legs up to the move. I call it a "3-headed Monster" because it will destroy you if you do not get out of its way when it comes through. The example above with VDC is a current example of just this case. I have scaled the time down to the 120 minute chart below so that the 3 legs and associated consolidation areas are recognizable. The 3-legs peak with the 3-headed monster on the daily divergence indicator I use. I did not look long and hard for this example - they happen all the time, that's why I use them. I just started using this on currency futures and was able to pull out a nice profit on the yen recently. However, I have been using this technique on equities for some time.



There are times when I will not exit the entire position when the 4 x ATR (10) has been hit. This is for "favorites" that are still above the 200 ema and exhibit a long trend on the monthly chart. An example is AAPL (see below).



With that said, I just noticed that I was up 23% on my AAPL position, so I will be selling a partial position in the morning to bank gains. I then plan on buying back that position following earnings if there is a sell off on the news.

AAPL is also a good example of a 3-Headed Monster in the making. The chart below clearly shows this, so peeling off a position at this time is a no-brainer. But, AAPL is a "favorite", so I will be holding it for some time.

In summary:

1. Scale into positions based on fundamental and technical analysis,
2. Place 25% stop of initial position - done if hit, move on,
3. Add to position if it gains 2% from entry and use 4 x ATR (10) for exit of position,
4. Peel off 1 position when gain is 20%,
5. Hold 1 position of "favorites" if price is above 200 ema and monthly indicator is still long even though 4 x ATR was hit.
6. Exit "favorite" position completely if either the monthly indicator turns neutral or short and/or closing price below 200 ema.