This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

Babak (one of my favorite bloggers) wrote an interesting article about the The Great New Pattern.

The concepts of capitulation and euphoria are nothing new, but they take courage to trade. Here is a chart of the QM (miNY crude). You can see where I shorted the breakdown of a symmetrical triangle that formed over the session. I also marked where I covered. I normally use the concepts of capitulation and euphoria to exit positions, but there is a ton of money to be made, using it as he suggests.

On Friday you can see where the longs threw in the towel (capitulation). With 15′ left in the trading session, it printed a hammer like candle. The following bar was narrow range, and showed strength. This was a prime opportunity to take the type of trade Babak pointed out. However, I didn’t have the guts to pull the trigger. I highlighted it in blue (thick line). With about 10 cents risk, you could have grabbed a quick 70 cents. That may not sound like much, but the miNY crude contract (QM) pays out $500/point. That’s $50 risk for a $350 gain for each contract.

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

I was away from my screens for most of the day. When I did get in (about 3pm EST) I was amazed by what a low volume day we were having. I looked around, and saw what I thought was a compelling trade idea on Steel Dynamics, Inc. (Nasdaq: STLD).

Here’s the chart:

My thinking went like this:

• a pretty clear-looking double top was formed earlier in the day
• price fell below the trough between the double tops (the “textbook” place to get short the pattern), but was stopped cold at 39.40ish.
• so, perhaps a lot of eager traders were trapped short, and would need to cover at EOD
• a box play had formed since the double top failed to follow through
• I thought, after an upward breakout, chances were good that round number 39.50 would serve as support, mid-channel.

So, I decided to play the box play on an upward breakout. You can see that I didn’t get to my target. There’s no way to know if my theory about the short sellers was correct, but there was a big surge of buying pressure at the end of the day (see the last volume bar). And, thank goodness for it, because it allowed me to get out for break-even in the final seconds of the session. I have yet to lose money, much less be stopped out, on a box play. I really like ‘em!

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If you are in an orchestra, I wouldn’t suggest playing the triangle. You’ll get no respect. But, in the stock markets, it’s a whole different story. I like triangles because they are easy to spot, fairly reliable, and have a built-in method for choosing a price target. You can play breakouts from triangles in either direction.

Here’s a really nice one that I missed today, on NVDA. Had I spotted it in time, I would definitely have taken this trade.

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A scalp like this is one of my “pay the bills” plays… little, reliable plays that I can usually find if I’m willing to look hard enough. As I get toward the end of the month, if I’m feeling the pressure to pay some bills, I get motivated to wake up on time and find these suckers. A few months back when I had a 100% win rate for 40 days or so, I was basically doing nothing but this move.

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From my twitter feed:

17 minutes ago

just had longest market order fill ever on CE… 2.5 minutes! I wanted 29.40 but got 29.53. Bastards! Broker investigating…

3 minutes ago

scottrade price-improved me to 29.40 on my bad CE fill. So, when I called them bastards, what I meant was, they rule. :-)

Here’s the 10-minute chart of the trade on Celanese Corporation (NYSE: CE). The blue lines mark the (admittedly sloppy) ascending triangle I was using as the basis of the trade. My stop was under the lower trendline. My target was a push above the HOD, which was 2R away. It was hit fairly quickly.

Now, about that fill… Two and a half minutes, on a market order. “My, this order is taking a long time,” I observed calmly. Yeah, right! I was severely pissed off. I watched lots of prints go by. The price walked up 15 cents from my intended entry at 29.40, with thousands of shares trading. I tried to cancel my order several times, but it wouldn’t let me since it was a NYSE market order that was in the queue already. Talk about a helpless feeling! Plus, since I was finally filled as the price was on the way down from its initial spike, I started off this trade in the red. That was no fun!

But, I held it together, and waited for the price to run up again. Luckily, it never went below 29.35 or so. At 29.33, I would have been in the red by my intended 1R amount, and I’d have to make a hard decision about bailing, or sticking to my original stop loss point (which would mean risking more than I initially intended to risk).

After I was out of the trade, I called up Scottrade. I’ve only done that a couple times, but it has always been a very pleasant experience. They looked at the trade, and about 15 minutes later they price improved me to the ask price at the time I entered my order. Very nice! Even though other brokers have more frills, it’s stuff like this that keeps me with scottrade. Plus, I know if it ever gets really bad I can go down the street to their office and yell at someone in person. Gotta love that.

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CE	| |

This is an example of one of the easier trading ideas from Mastering the Trade (McGraw-Hill Trader’s Edge). The author prefers to use this idea in currency markets, because he says they break out cleanly. But, as long as a stock is in a solid trend, I’m finding it works okay in the stock markets.

It’s really not too original an idea… plenty of books on chart patterns will show you a channel breakout pattern. I like the way Mastering the Trade describes it, though, because it emphasizes the importance of making sure the stock hits each trendline at least twice (and preferably three times).

Here’s an example of a box play on Companhia Vale do Rio Doce (NYSE: RIO) today.

Setup

Strong up move on strong volume in RIO, making new 52-week highs. Rising ADX on 60 and 30 minute timeframes.

Entry Criteria and Trade

I saw the box form on the 5-minute charts towards the end of the day.

1. A local high is formed at 32.45. I draw the upper line.
2. The stock reverses from a low at 32.14. I draw a lower line.
3. The stock moves up and reverses from 32.43. Not quite touching the upper line, but good enough. Had it gotten a little higher, I would have moved the upper line up. Since it stayed lower, I leave the original 32.45 line in place.
4. The stock dips down to 32.14 again, and reverses. When in retraces 25% back into the “box,” the trade is ready. I will short a drop below 32.14, and buy a rise above 32.45.
5. The stock breaks out to the upside. I buy, and my initial stop loss goes at the lower line, at 32.14. My profit target is the same width as the box, or a 1:1 risk/reward ratio.

Profit target is hit a few bars later.

To read about this play and several others, check out the book. Trader Mike wrote a great review of it a while back, if I haven’t convinced you.

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RIO	| |

Today’s example of yet another OR high == yesterday’s HOD setup comes from Cognos Inc (Nasdaq: COGN):

… I was lucky enough to spot this one in time, but stayed out. I wanted to do the wait-and-see thing because it wasn’t doing as much volume as the other examples I had seen, and the negative overall market mood and negative nasdaq TICK. But, I should have just believed in it, I guess. I suppose it could fail from here, but it’s held up well thus far. I have yet to see an example of this setup that has failed without giving at least some profit first. I’m sure they are out there; I just haven’t found one.

[update 11:26 EST: it just hit 44.00, so I would put this firmly in the "didn't fail" category, no matter what happens from here]

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Today’s example of the pattern I’ve been talking about is from Ceradyne Inc. (Nasdaq: CRDN):

Of all the ones I’ve put up on my blog, I’ve unfortunately only spotted one of them in time to trade it. Primarily because I’ve been oversleeping the last few days (or, if you got mail from me at 4am, you know I actually underslept, then napped right through the open!). If people spot examples that didn’t work, I’d like to see them. It seems like a really solid pattern so far. Has a nice breakout when it breaks. I’m not sure if the 5ma (thick grey line) being so near is necessary or not, but I’ve noticed it’s almost always near when this pattern emerges, as well.

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One pattern I’ve noticed being pretty powerful lately, is like what Patterson-UTI Energy Inc (Nasdaq: PTEN) did today. Here’s the 2-day 30 min chart so far:

The key is that the openening range tops out right around yesterday’s HOD. It seems like when it breaks through that, it tends to do well. I mentioned this pattern about a week ago in regards to a trade I made. In that other post, I mentioned two examples I had spotted. I’ve been noticing it more and more.

I should also point out that the OR high was near (but not exactly at) round number 26. That was a factor in the trade in the older post, as well.

I didn’t notice the PTEN setup in time to trade it today… the daily trigger for a trade was around 26.40, well into the run.

[edit: I see that Grant Prideco (NYSE: GRP) is another example from today, minus the round number.]

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A few minutes ago, I scalped NYSE Group Inc (NYSE: NYX) for 0.4 R in less than 20 seconds. That was fun, and it reminded me a lot of my Noble Drilling Corporation (NYSE: NE) paper trade yesterday.

What they had in common was:

• A break to a new HOD during morning trading, after a good-sized retreat from the earlier high.
• The earlier high also happened to correspond to the high-of-day from yesterday.
• The earlier high was within a few cents of a round number.

NE had steady but lackluster volume yesterday, and I may not have taken the trade in my real account. NYX was posting strong volume today, so that’d be a fourth reason to get in. I should also point out that the break corresponded to an important position on the daily chart, so you can make that 5 reasons if you are looking at this as a trade, rather than a scalp.

Here’s the 5 minute chart I was watching. I bought in above the line, but it was moving so fast that my avg basis was 97.15… good sign on a breakout as long as it holds! You can see how yesterday’s HOD corresponds to the 5-min opening range today, and how they happen to be right at 97. Nice!

The lesson in all this is, the more factors there are in your favor, the more likely the trade is to succeed. That doesn’t mean it will succeed, of course; trading is a probability game, and the coin can still come up tails no matter what.

Well then, why scalp NYX and not try to hold onto it for a trade? Unfortunately, there were also a few factors against it, as well. First off, the spread was really wide at times, as much as 12 cents. Second, I know stocks can turn on a dime in the first 30 minutes of trading, and I made this trade at 9:45 EST. Second, I was buying into this stock at 97.15, at the top of a non-stop run up from 95.80ish (you can see that in the chart above). That’s a big run not to reverse a bit. Of course, as I write this, the stock is at 98.36, well over 1R for me. But, to get 0.4R in less time than I can eat a hamburger pleases me just fine. Plus, to get that 1R, I’d have had to hold the stock through at least one drop below my entry price. That takes some confidence that the wide spreads and early action do not give me!

Note: nyx was a highchartpatterns.com pick. I subscribe for their service, and I’m happy to give them free advertising when they make me so much money. With this trade, they just paid for themselves for another few months! You can see my review of their service here.

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NE	| |

You all know by now that I don’t make many trades per week. I wait for the best of the best of the setups I can find. That’s why it’s important that when a stock is setting up like I want that I don’t miss the opportunity. Today, I missed a great scalp on NVIDIA Corporation (Nasdaq: NVDA). Take a look:

See the setup just under 30? It looks just like the picture I post every day on the daily high/lows postings. Chart patterns tend to have that quality, that they work on all time scales to one degree or another. Of course, the smaller the time frame, the lower the expected payoff, and the more noise there is to deal with.

So, for a setup that’s only on the 10 minute chart, I would have just rode whatever enthusiasm there was in the break, and let go. (Let’s face it, that’s all I do for just about anything lately). I wasn’t too excited because I didn’t like the daily chart much for NVDA at this point. But, pressing up against resistance at 29.99 like it was, I was definitely interested.

Then I got an email. And I read it. And I replied to it. And when I turned back around, the darn thing had run 50 cents or more. I waited a few more minutes to capture the chart so you can see why I prefer to take profits early on a pop like this one. It came all the way back down to 30.01 in the next 10 minutes. If I were a top-picking go-against-the-trend kinda guy, I’d have shorted it near the top. I used to try to do just that. But, sometimes you get burned extra bad on those plays.

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NVDA	| |

Dow up 116 as I write this. As you can imagine, not much on my watchlist is getting closer to my entry points right now. Maybe this is just the “up phase” of the day, and this afternoon will be more exciting.

Whether I end up making trades today or not, I will post my weekly summary later tonight, as well as my review of July. I am going to consider July over today, because I’d like to do these reviews at end-of-week.

On Summary Chart Distortion

Akami Technologies, Inc (Nasdaq: AKAM) did press through my 37.40 target, briefly running up to 37.73 before turning around. I didn’t take the trade, though, because there wasn’t a lot of volume behind the move. I wanted to see it bounce back off 37.40 for confirmation. Instead, it fell right through and hasn’t looked back up.

But, while that’s disappointing, the silver lining is that it makes a good example of how daily and weekly charts can be misleading. Lets say the price never recovers today. The weekly charts will still show a new 52 week high happening this week, even though it was just a nothing fakeout move. Do you want your trendlines to be skewed by two minutes of anomalous price action? I don’t! Here’s that weekly chart… see how the three recent peaks seem to be going up?

Some people ignore the wicks on the candles when drawing trendlines and support/resistance lines. In my opinion, that’s just as bad, if not worse. Consider that this weekly chart would look exactly the same if the stock had stayed up at 37.73 for most of the volume Monday through Thursday, and then dropped down to the weekly close in the final minutes of trading today. There’s obviously a big difference between that scenario and the one that actually transpired. So, both blindly observing and blindly rejecting chart extremes would appear to be a mistake.

The only way to tell if chart extremes are significant is to drill down for more detail on those areas of the charts. In this case, going to the daily charts would reveal that it only broke out on Friday.

Then, going to the intraday chart would show the move only lasted a couple minutes on low volume. It’s more effort to do this , but it pays off. Here’s the 5 minute chart. See how it can’t even stay above 37.50 during a single 5 minute candle? Yet, I’ll point out again, it had the same effect on the weekly charts as a sustained four day move would:

This kind of distortion also happens intraday, if you think about it (and, frankly, even if you don’t think about it!). Say you are looking at a 15-minute chart and see a hammer candle. Did it hop up from its lows at the last minute on no volume, or did it grind its way up from the low over the last 10 minutes on consistent volume? The 1 or 5 minute charts will help you discern which case is which.

Here’s the vaguely relevant tinfoil hat portion of the post… All I know is, when I’m watching charts, I see tiny bursts of activity just before the 15 and 30 minute candles close sometimes. When I’m feeling paranoid, that makes me wonder if some of the MMs and Specialists play games with the prices to manipulate how the charts look. That way, people that pull up 15, 30, or 60 minute charts will think they see some bullish pattern that was actually a last-second fake-out move. I suppose a more rational explanation would be that my chart service is not 100% in synch with every chart around the world, and people making decisions on their thirty minute boundary looks like activity just ahead of my thirty minute boundary.

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