Just a short day, today… only traded the first hour. Maybe, if I get bored, I’ll check in at the last hour and see if any trades jump out at me. But, probably not.

Trades were on RIO, RYL, and @ESZ07. All for wins.

Life is good.

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

On Wallstreak yesterday, there was some discussion about whether scalping short in the StreetSmack method is just attempting to call the top in a move. There are an infinite number of potential tops in a move, but only one true top. Your odds of getting it exactly right are slim. Better to short a weak stock.

This is all true. However, there is more to a parabolic short than that! You only want to enter a short if there is a convergence of several things:

1) Momentum divergence, meaning price made a higher high but momentum made a lower high.

2) Potential overhead resistance is being reached. This can be a pivot point from a daily chart, an upper trendline from a price channel on the 15 min, a 200 day MA, a 52 week high, etc. Anything that could potentially offer resistance to further price movement.

3) Price action up to the resistance point must be parabolic! A slow uptrend or any consolidation at the resistance is just as likely to break out as break down, and there’s no edge at that point. A parabolic rise, however, is probably not sustainable and will likely be repelled by the resistance as it is already overextended.

The question becomes “How do you define parabolic movement?” There are a number of ways, from eyeballing, to actually calculating a mathematical formula for a parabola. My method is this: Compare the price movement to a moving average on a higher timeframe. Say the price on a stock has spiked up $2 in the last 15 minutes. If a fast moving average is not able to keep up with the move, then this is a parabolic move. Price usually does not get far from the 5-ema without retuning to it (or at least close to it). So if price gets too far away, it’s likely (not guaranteed) to return to it. So my definition of parabolic is an extreme move away from the 5-ema on a chart with a higher timeframe.

Even with all of this, you still don’t want to enter a short yet! You can scale in a very small position here. As price goes down (or up) you can scale in and out to dynamically change the average price of your position. But you still haven’t really entered yet.

The cue to finally enter and pile in big for your full position size is a big downward break. You wait until it’s obvious that there will be a collapse. If it never comes, you never fully enter. You’re not shorting the top, you’re piling in to a stock that is in a confirmed downtrend on a very short timeframe. That’s the difference.

These charts of my trade in RIO show each of the above elements–Momentum divergence, nearby overhead resistance, parabolic upward movement with respect to the 15 min chart 5-ema, and a confirmed downtrend before the big entry.

Just to make a point, I traded one more time today while writing this (I lost -4.5% today in 7 losing trades with only 3 winners. I’m killing myself by forcing trades. I took good setups, but they didn’t work. But RIG did (which I didn’t trade), and it was just like trades I took in HANS and AGIX; go figure).

Anyway, I traded very small, scalping URBN short, so it was basically just a practice trade. This is a poor example, but it’s the best I could do on a Friday before a holiday weekend, okay? :P It shows all of the elements outlined above:

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

Wow, what a day. HUGE dow rally at the end of the day of over 300 points. Ignoring how fishy that seems, I never feel like I properly capitalize on those moves. I missed a lot of the middle of the day today, as I do every Thursday. But, I still made 6 trades for 4 wins, 1 loss, and 1 b/e. Not bad.

(I don’t know why I was saying 27.40 instead of 12.40 in the KFN example…. just too sleepy)

I will never trade EXM again. Unless it sets up really nicely and I forget. But probably never.

Everyone go congratulate Dinosaur Trader, who had the second best day of his career today, and Trader Bubs, who had the best day of his career today.

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I made too many lousy trades to post. I tried to re-enter a couple of them as well. I will post my first trade, which was a loss, but should have been a gain. I overtraded and wiped out most of my gains from yesterday. To make a long story short, I need money come summer for an important visit with my daughters. I was overly confident from the gains I have amassed this month. The market didn’t care how well I was doing. She wasn’t ready to pay me the amount I figured I needed. One trade at a time for this humbled trader.

Companhia Vale do Rio Doce (NYSE:RIO)

Stocks Mentioned In This Article
Stock	Links
RIO	| |

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

Only two stocks made it through my volume screen today, and one of them was disqualified for gapping through my trigger price. The gapper was PHI, which left Companhia Vale do Rio Doce (NYSE: RIO). It opened just below the trigger price, meaning you had to be willing to trade it in the opening 5 minutes. Unfortunately for me, I was not! By the end of the day, it had done nearly 3x its normal volume. With a 15 cent stop, I think I’d have maybe taken 2R at the 10AM dip. But, had I been braver, this trade would have been worth 9.4R or so toward the end of the day. Wow! [EDIT: I see Eyal caught RIO today. Good Job!]

	Symbol	Avg Vol	Volume
	RIO	6,339,000	18,864,900
P/L	Maybe scared out for 2R, or maybe 9.4R for 0.5% stop 4.5R for 1% stop 2.2R at EOD for 2% stop
Charts

Like I said, that was the only thing on my screens today. I saw later that Hilton Hotels Corporation (NYSE: HLT) also triggered, with 1.43 times normal volume by the end of day. I frankly didn’t like the looks of the daily chart, so I may not have traded it even if I was looking at it. Still, it never dropped more than 8 cents below the trigger price, so it acted quite well. Unfortunately, it had trouble breaking through round number 36. That’s always an issue with the trigger is under a round number…

	Symbol	Avg Vol	Volume
	HLT	2,940,000	4,211,000
P/L	1R at EOD with 0.5% stop 0.5R at EOD for 1% stop 0.25R at EOD for 2% stop
Charts

So, two triggers on above average volume, and 2 wins. Not bad. Not bad at all…

Here are the DIA and QQQQ charts for reference….

Symbol	Charts
DIA
QQQQ

Stocks Mentioned In This Article
Stock	Links
RIO	| |
HLT	| |

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.

Stocks Mentioned In This Article
Stock	Links
RIO	| |