Technical Picture - Bears Own It

Overnight futures rallied on news of Obama's compromised tax legislation. As the markets were setting for the open NQ futures broke out of a bull flag, but S&P and DOW did not confirm. Both the S&P and Nasdaq opened at fresh highs not seen since Sept. 2008, but the DOW failed to open above the Nov. 2010 high. Non-confirmation usually leads to reversals. The gap was faded with volume, hence a momentum move to the downside, followed by, the usual midday chop. Prices retraced back to the ambush zone, at which point, the bears took back control and crushed prices down to the 62% FE in the last hour.

As depicted on the S&P chart above, today's sell-off was on big volume. The intraday action was highly predictable just by studying price/volume and the candlestick action in the ambush zone.

The bears controlled the open and close and expect some follow through.

After watching Zortrades Monday night show on stocktwitsTV and studying the charts I was inspired to be bearish again towards gold and silver. Prices on some of the charts had traded outside the daily Bollinger bands for 2-3 days in a row and needed to correct. All we needed was a gap open.

The gap open was my cue and I shorted AEM, SLW, and CNQ on the open. The AEM chart below was my favorite. SLW almost identical. CNQ was slower, but eventually succumbed. After locking half, I'm swinging all three. Watching today's midday retracement highs to hold as resistance on the swings.

ONXX was a gapper. After it established support in the upper range of the opening gap, I entered long on break of NR7,or probably NR5. The opening range is too wide, so I eventually placed my fibs at the base of the cup. Markets were too weak and the C&H BO failed, but the early entry allowed for a good profit.

CTRP, another gapper, offered a good ambush trade, but I missed it. Instead, I took it long after a nice basing period at $46.00. Took a partial when it felt like it was stalling, and exit on the 62% FE.

A few stocks on my Focus List

AAPL - The third pivot in to the baseline is usually the charm. Failure here should retrace at least to the ambush zone.

LVS - Mentioned this one in my last post. It started to BO of the bear flag late in today's session.

NFLX - 60 minute chart - perfect ambush on the open. Look for NFLX to make lower lows, at least to gap support, and most likely to gap fill. As long as the RSI holds the 50-60 zone as resistance, the stock is weak.

Breakout Comparison - ARO vs CRM

To help determine the probability of BO follow through, focus on these two key areas: 1) daily chart setup, and 2) intra-day price action around the opening range or BO.

Here are key comparisons between ARO and CRM on 6/3/2010:
From the daily charts below, both had notable daily patterns with BOs on 6/3. ARO had pulled back to form a symmetric triangle, but it was below key price pivots and below its declining 50 day MA. The CRM setup was much better technically. CRM formed a B&B above its upsloping 50 day MA. In general, a flat-top B&B in a strong uptrend is more powerful than a symmetric triangle below recent price highs. From a daily comparison, CRM carries the higher probability of follow through.


On the 15min charts below, I marked several features: 1) range/volatility of the 15min OR bars, 2) proximity of the first pullback to the 15min 5EMA, and 3) proximity of the BO level to the 5EMA. While both gapped up on the open and both had upper wicks on the OR bar, ARO was much more volatile and moved "too far too fast". CRM moved up and had an orderly pullback to the 5EMA while ARO remainded well above the 5EMA. The BO level in ARO was well extended and above "loose" price action. The BO level in CRM was much closer to the 5EMA and associated with "tight" price action. From an intraday perspective, CRM gets the nod. The result was that CRM trended up all day while ARO spent the remainder of the day consolidating the volatile OR action.

Seeing Stars on Indices - SCHN, FSLR

Longs need to be very careful here. The gap up opening was reversed mid-day and the broader indices formed high volume star candles on the dailies. The attempted push up (last 2 days) from recent consolidation could be a head fake at the top of a bear market rally. The market feels heavy and the VIX is finding support.
Stewie (The Impatient Trader) posted a daily chart of SCHN last night calling for a potential BO at the 48 level. I added it to my WL and the first two 15min candles were textbook GapnGO. It quickly exceeded the 62% extension of the OR. I took a partial on first weakness and got a better exit on the second half. Thanks Stewie.


FSLR is WL regular that stood alone today when sorting by %change. Due to the high price and volatility, I traded small and went down to a 10min timeframe to help manage risk. It quickly reached the 62% extension of the OR.

Real-Time Scanning Strategy

Using a real-time (RT) scanner seems exciting. The thinking is - out of the thousands of stocks, ETFs, indices, etc., the scanner has just flagged "this one". However, after playing with RT scans for awhile, you find that most scanner settings produce too many hits and don't flag a setup that can be entered immediately. Given a few more seconds/minutes, the scanner will find another trading candidate and then another... This is the case with most canned scanner configurations supplied with the software.

So, when using a RT scanner, the big issue becomes 1) How to sort thru all of the scanner hits to find a solid low-risk entry, and/or 2) How to create custom scans that are much more restrictive (fewer and higher quality hits).

I have been working with custom RT scans (in Trade-Ideas (TI) ) for the past several years. The key for me is to scan for unusual/extreme price action combined with unusually high volume (especially during the opening range (OR) period), and then to monitor for low-risk setups. Although the implementation details will vary depending on the scanner you use, here are the scanning filters I use:
1) Price - eliminate low priced markets by requiring Price > $10.
2) Average volume - eliminate thin markets by requiring Average Volume > 1M shares/day.
3) Relative volume - find unusual volume by requiring Relative Volume > 2 (greater than 2x average volume for the current time of day).
4) Find unusual price action by using one or more of the following:
a) Gappers - gap up/down by 1.5% or more.
b) Impulsive move - change up/down with respect to open of 2.7% or more.
c) Gappers and quick moves - % change up/down of 3% or more.
5) To overcome recent support/resistance - require trading outside of previous day's range.

** NOTE: The thresholds for each option are somewhat arbitary and may be tweaked/changed depending on market conditions and/or the number of hits your desire.

Combined with the above filters, I use a heartbeat alert with a settings of 10 mins. This means that if a stock continues to pass the scanning criteria (filters), it will hit the scanner every 10 mins. The screen shot below shows some canner hits (long on left and short on right) from Friday morning. The last column in each scanner windows displays the Relative Volume.

I add a manageable number (15-25) of the scanner hits (during the OR) to my watchlist (WL) and cycle thru the WL looking for patterns and low-risk entries. I also run a scanner on my WL that alerts on NR7 (narrowest range of the last 7) bars. The concept is that in an active market, range contraction alternates with range expansion. If a NR bar forms at a key sup/res level or within a larger pattern, it may represent a good low-risk entry point.

I would like to alert on inside bars (IB), but TI currently does not offer IB alerts.

Best Setup of the Week (Perhaps) - WYNN

WYNN had a strong 3-4 day upside move on the daily. Yesterday was a gap up that formed a shooting star on big volume. A red candle today could confirm the shooting star and potentially form an evening star on a weak close. What happened? A gap down open that had the potential to leave a 1-day island reversal. Here is the daily chart.


How to trade the gap down? Draw Fib line across the opening range (OR) and read price action in the congestion zone (38-62% Fib levels). Bars 3 and 4 (15min) were narrow range with bar 4 closing weak and just below the congestion zone. The entry was a breakout of bar 4. The 62% extension of the OR is a good profit target (normally). Since the 62% target was achieved so quickly, perhaps I should have targeted 3 WR 15min bars for my first exit. WYNN setup a second entry 'beyond the extension' for a continuation move. In fact, it closed near the low of the day.


Had I set my Fib lines from the PDH to the ORL (classical method), here is where a 62% extension target would have triggered.

Single Focus - RIMM

Coming into today (Friday), I knew that RIMM had beat estimates and was going to open with a big gap up. Sometimes I choose to focus all of my attention on a single stock if: a) I have limited time due to work, and b) I know that one of my watchlist favorites (such as RIMM) is going to gap big and probably trade huge volume.

Below is a 10min chart of RIMM. The first candle was a doji with long lower wick. The second bar was bearish and closed below the 50% level of the OR. The third 10min candle closed just below the 62% retracement zone and was the narrowest range of the morning. That was the trigger bar.


I could (and should) kick myself because it traded exactly (to the penny) to the 61.8% downside extension of the OR. I was EXPECTING more range and missed the exit. The stop out resulted in less than half of what the target would have generated. Afterwards, I could tell that the indices were in consolidation mode and RIMM was acting similarly. Overall, a fairly choppy Friday.

Path of Least Resistance - Up

With the gap up in the indices on Thursday, longs setups were abundant from both my WL and from gapper scans. Here are a couple of gappers that were also on my WL. Initial setups in both were based on Fib levels drawn with respect to the 30min OR. Both were closed at the 62% extension of the OR.



RIMM (above) beat estimates after the close and was trading up $11+ at $60-61. I always feel cheated when I daytrade a stock (long in this case) and it jumps big after the close. Oh well, I got a piece of the action with small risk.