Wednesday, July 20, 2011

7-20-2011 Revisiting the Umbrella

Hello Traders,

I just wanted to revisit the umbrella one more time before I move on to another topic. This afternoon the patter developed late in the day, I bailed on my long trade and flipped short on the break of the regular trading hours (RTH) mid-point. At that time I tweeted that testing 16's was a possibility. Sure enough price tested 1315.75 in the after-hours session. I rarely hold through RTH settlement but the weak close gave me plenty of confidence to give it a shot. Although I didn't get the full move I'm still very happy with the profit I did capture.

Just to reinforce, this is a pattern you will see repeat itself very often. Part of trading is breaking down the market into easy to remember shapes, figures, formats, and patterns. Memorize as many as you can and when you see one begin to form you will have confidence in expecting a positive outcome.

Thanks for reading and stay tuned for some new material.

Good Luck

Wednesday, July 13, 2011

7-13-2011 Umbrella Pattern

Good evening traders,

Tonight I will review today's price action and introduce the umbrella pattern. I learned this pattern while studying with one of my mentors. The reason it is called the "umbrella pattern" is obvious when you view the picture. I drew in the cane part of the umbrella to make it easier to visualize. In this pattern price shoots up and then slowly drifts lower all day. The umbrella shape is formed by the EMA. This moving average is crucial on a 5 minute chart. You fill find that it often lines up with key areas of support and resistance, such as the volume weighted average price (VWAP). I never trade without it!

After breaking over the opening range and then the initial balance high, prices were capped by the 25-27 resistance area. That area coincides with the lows of July 6th. Around 1:15pm est prices had fallen to the VWAP and minor support at 1322.00 I took a small long here but bailed after we couldn't maintain the initial balance high of 1324.25. In the afternoon I tweeted:

"its after 2 pm est and we are below the initial balance hi, this makes me weary of taking any long trades"

The mid point held as support briefly but prices were held down by the VWAP acting as resistance. Once the mid point broke, it became evident that we would end the day toward the lower end of the range. On the chart I drew a lightening bolt where you can tell the umbrella pattern is in full effect. Once price has slipped below the ema and cannot rally above, its a sure sign that a downtrend has emerged. The cumulative delta breaking down and a weak stochastic reading added more conviction to the short side. After the breakdown of the day's lows price had a nearly perfect extension to the 23.6% Fibonacci level. 1310's were also a low value area on the micro composite, a swing low from yesterday evening, and there was a gap fill at 1310.75.

In after hours trade, news of Moody's reviewing US debt ratings dragged the market down to 1302. So far this decline has been very orderly with average selling volume on the way down. I am still expecting a test of the 1290's before further upside. This will of course depend upon the geo-political climate. Things are getting hot this summer and there is a lot of news for the market to react to. I will continue to monitor headlines out of the White house, Libya, European Union finance ministers, and blue chips 2nd quarter earnings. Make note of the umbrella pattern, I can guarantee you will see it again in the future. Just like in nature and architecture, The arch is also a pivotal figure in the stock market.

Thank you for reading. Good luck and good trading,


Monday, July 11, 2011

July 11, 2011 Recap

Good evening traders,

I have been wanting to do a blog post on one of my favorite trades, The gap fill. This trade is a bread and butter move for most traders because of the frequency with which the setup occurs and the high win rate. Unfortunately there hasn't been many gap fills to write about. We barely even get a half gap filled anymore! I understand it is mid summer and the market dynamics are different during this time of the year, but I feel like this has been going on for months. Some traders attributed the decreasing of this phenomenon as a result of government intervention in the markets. The Fed's bond purchases and the increased volatility caused by the debt crisis in Europe seem like plausible explanations. However, I don't think anyone will ever know the truth. Regardless of what's causing the lack of the "gap fill phenomenon" one thing is certain, there will be a reversion to the mean. Keeping that in mind, its still important to know the trade and it's rules. I will revisit this topic in the future. When I can illustrate it in real time

Today's trading was boring to say the least. the majority of the day we spent chopping around a 4 point range. If you bought the opening swing breakout in the direction of the gap around 1324.00 (always a high probability trade) you were lucky to get 2 points before resistance in the 26.00-27.00 range capped the upside for the morning, and the day. Remember that the first 90 minutes of trade is likely to contain either the high or the low of the day!

Once the initial balance formed we were trading at initial support for the day in the 19's. Typically, the gap fill traders will puke up their positions around 10:30 est - 11:30 est. This presents you with two opportunities. One is to try and catch the late shorts then jam them back up into the opening range. (If you aren't market minded send me an email for an explanations). The other is to go with the trend. Given the bounce back we had below 15, I thought the trade was going to be trap shorts. I bought at 1315.25 just after 11:00 and the trade worked well. However when priced failed to get above the midpoint or VWAP(volume weighted average price) that was a good signal to take profits or initiate shorts with the anticipation of range extension. At the end of the day, price was ultimately kept above the monthly low and the S&P's 50 day moving average. I would consider this a pullback within a larger uptrend.

Bigger picture; If we are to continue higher I'd say its likely we back and fill down to the 1290's. Or until the US budget is figured out, and fears of contagion in Europe subside. Today marks the beginning of summer earnings season, so be vigilant. Trade smart, don't gamble on earnings. Remembers "Traders know when to quit, Gamblers press their luck." Good Luck and thanks for reading.


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