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.

Daily Setups

PLD is stock I added to my watch list recently when it showed up on the TI scanner. Today it broke out of a solid base , following range contraction, the significance of which Jim highlighted in the last two posts below.

As you can see from the daily, this setup is ideal for a swing trade as well as a day trade. I think PLD will run to $20.00, so if you missed the BO today, you could get a second chance in the coming days.

On the 15 min. chart below, the opening range is extremely wide, so it's best to place fibs from ORL to ORH as per Trader-X guideline # 4.


AMZN also formed a solid base with several pivots over the last few weeks. Yesterday's gap was faded but price fell into a sideways chop. Today, it moved in for a retest of yesterday's high and set up a relatively easy entry. The only thing I didn't like, was the sideways action immediately following the entry, but when it finally decided to go, it was sweet.

BMO is on my Canadian WL which is quite short, so it was easy to spot.

Gapper Double Play - Tween Brands Inc. (Public, NYSE:TWB)

TWB was an earnings gap from the Briefing.com list. It had a wide opening range, followed by a hammer reversal and a lot of backing and filling. Eventually I spotted, a bearish flag formation as price and the down sloping 5 period ema came together. The flag culminates with NR7, the perfect trigger for price expansion.



PTRY, also from the Briefing.com list, was pointed out to me by Jamie Hodge of Trade-Ideas. I didn't trade this one, he did. But I wanted to post it in all its beauty because it's a perfect example of the opening range breakout generated from our bread and butter setup "NRIBs" (narrow range inside bars) on declining volume.

I'm keeping TWB on the focus list for tomorrow, looking for continuation. Next support level on the long term chart is $15.00, so there's still a lot of room.

Dummy Trade of the Day - McDermott International (Public, NYSE:MDR)

Prior to Friday, MDR had carved out two inside bars as highlighted on the daily chart above. Notice the price and volume contraction on Thursday - NR7. Also note the rounded top which generally signals too much supply. Every time buyers try to push price higher, they are met by an over supply from sellers.

On the 15 minute chart below, we see that MDR gapped lower on the open and tested support on the OR. The second bar was inside on declining volume - an invitation to short. All of the MAs converged over price. MA convergence combined with a narrow trading range foreshadows a big move.


CIEN breached support in the morning and came back for a retest. The retest formed a perfect bearish flag - another invitation to short. Notice how price cannot close above the down sloping 20 EMA on the retest.

Trading Opening Gaps - Dummy Setup - Wide Opening Range (WOR), Base and Break Pattern

In lieu of Trading Gaps Dummy Style Part II, I've decided to document different gap setups with entry and exit rules for each. This will enable me to build a library of easily identifiable gap trade setups and perhaps develop success rates based on my own experience.

The first setup in this series is what I am calling the Wide Opening Range (WOR) Base and Break Pattern. I traded two of these on Friday - (NASDAQ:YHOO) and (NYSE: STP) and also found (NYSE:FOE) which I did not trade, on Friday's gapper scan.

As you will note from the following three 15 minute charts, the characteristics of this pattern are as follows:

Opening Range (OR) - wide with little or no shadows - in general, the shadows make up less than 25% of the OR;

Base - consolidation of the gap takes place in the upper/lower third of the OR. The base is usually, but not always aligned with the OR high/low.

Volume - is above average relative to the recent range;

5 Period EMA - Price observes the 5 period EMA (gold MA) as support/resistance.

Wide Range Bars (WRB) - this setup usually has three WRBs including the OR (labelled 1,2, 3). The second WRB is usually the entry bar and the third bar usually marks the end of the move.

Fibonacci Extension - all of the examples below, were successful in tagging the 38% extension.

CAL and JOYG are examples of the WOR Base and Break setup from the past.

Entry rules: Allow the gap to consolidate so avoid trying to enter too early. YHOO was the quickest to break on Friday and I also noticed that it had a much wider gap comparatively speaking. Don't enter until the OR high/low is breached. Ideally you want to enter when the 5 period EMA is close enough to provide reasonable support/resistance in case of a false break. If the base is not perfectly aligned with the OR high/low, draw a resistance line to determine the entry point. In my own trading, I like to buy 2 cents above the base because I want to make sure that price is actually being bid up and not just someone hitting the ask. This strategy works reasonably well when there no spread between the bid and the ask. I use the same two cent margin in setting my stops.

Exit Rules: I used to take a partial after the third WRB, and noticed over time, that staying in the trade rarely generated additional profit and often resulted in a stop out on the second half, so going forward, I will exit 100% as the third WRB completes itself or on a tag of the 38% retracement.

As always, my inspiration for trading gaps dummy style comes from reading Trader-X, Trader Mike, and MaoXian. Don't forget to check the archives and the comments.

Dummy Trade of the Day - NVIDIA Corporation (Public, NASDAQ:NVDA)

The market gapped up this morning and so did most of my usual suspects. NVDA printed a wide OR bar with a long upper shadow. The next bar tagged the rising 5 period EMA closing strong and in so doing carved out a bullish reversal hammer. The next two NR doji sticks flirted with the downsloping 50 period MA. The fifth bar finally took out the OR high on an uptick in volume and this was my signal to get long. NVDA made a steady ascent on strong volume and came 5 cents shy of tagging the 100% Fibonacci extension. I was stopped out in late day weakness. I did not take any partials as price tagged the various Fibonacci extension levels because the pace was steady and price never closed below the rising 5 period MA.

Managing the Trade - Apple Computer, Inc. (Public, NASDAQ:AAPL)

Yesterday's big winner turns out to be today's big frustration. I shorted AAPL on a break of this morning's bear flag pattern on the 15 minute timeframe. The trade went along smoothly until price approached the OR range low and started to reverse. I immediately covered 50% because until the OR is taken out on a closing basis, the trade is vulnerable (my interpretation of Trader-X rules). After price rallied and failed to take out the 20MA, I lowered my stop just pennies above. It may sound odd, but when I finally got stopped on the balance of my position, I felt relieved that the frustration had come to an end. After being stopped out, price rallied and tagged the OR high, pivoted and pulled back in. My next entry was a scalp at $80.60 and I was stopped out at $81.19.