Confluence- Ford Motor Co. (F)

I've been listening to Tom O'Brien for several months now and have learned quite a bit. He uses, among other things, the idea of confluence throughout his technical analysis of charts. He defines it as "the price range sandwiched between the 0.382 retracement level of a trend and the 0.618 retracement of a related subtrend; confluence reveals powerful support and resistance level."

The method is used to find entry points and help establish stop loss levels. I'll use an example of a stock that I have wanted to short for a long time but didn't have the right entry point. Ford Motor Co. (F) is dying and I would like to make some cash on that fact.

First, I need to set up the trend and subtrends. I chose to look at the long term downtrend of Ford. The analysis of the weekly chart revealed confluence to be at 7.88 and 7.66. (A1 = 10.87, A2 = 8.67, and Focus = 6.02) As it can be seen, the price already broke through confluence on high volume. However, three week ago, Ford took a nose-dive on huge volume and began an ABC down pattern.

Now, lets examine the shorter term chart. Ford established a new uptrend with a powerful ABC up that busted right through the downtrend confluence points. Ford then fell off the highs on big volume and then made another leg up to finalize a double-top pattern. Now Ford is in the midst of an ABC down, coming off the second high of the double-top on massive volume. This time, slicing right through the newly established uptrend confluence points (green lines). I expect that Ford will rise up to the C point in the ABC down and then continue down. The C point will most likely be between the long term down trend confluence points of 7.88 and 7.66 (red lines).

Vacation time

Time for a break. I gave back most of the gains I made with the MIND trade by going short too early (again). Will I ever learn? I must be patient!!! In the meantime, I will continue to watch for a break down in our leaders and keep my eyes open for short setups.

Now I'm off to the OC. It will be nice to see the family but Orange County, CA can be hard to take sometimes. Thank God Becky is going to help me through the madness.

Flotek Industries

After a little consolidation, Flotek resumed its upward march the last couple of days. Today was a technical breakout from a cup with handle base. The 50% correction of the last few months was pretty severe, usually a good base should only correct by 30-35%, but all signs point to higher levels.

• The 50 dma crossed the 200 dma.
• IBD ranks FTK in the top 5 of the Oil&Machinery/Equip Group.
• Someone said that it is VectorVest's #1 stock pick. (who cares)
• A+ Accumulation rating
• 96 Relative strength
• This all adds up to more exposure and higher prices.
  

What more can I say about FTK that I haven't said before. This was a no brainer down at the $15 and $18 levels.

I couldn't pass up the sell

Back on Nov 29th I picked up some shares of Mitcham Industries (Mind) for $12.01. I did this as the stock pulled back after a modest breakout. Earnings came out today and the stock was up to $15.50 in pre-market trading. The only problem was, this huge jump came with only 5,000 shares of volume. I know pre-market is not very liquid, but only 5000? A quick check of the earnings report showed that earnings were good but certainly not great. I sold right when the market opened.

It turned out to be a pretty good move. Check out the chart.

Identify the leaders (because they lead us down)

Today was the first day in a long time when the Nasdaq and S&P ended the day at the lows. It made me think back to earlier in this rally when my mom called just after the Dow hit new all-time highs and expressed some worry about my investments. The market was strong and seemed to end strong on just about every day. I told her that she should only start to worry when the market stopped acting this way and began to close sharply down.

The top is near! We picked up another distribution day today (3 on the nasdaq) and if we pick up another two in the next couple of weeks we will finally have that correction that I've been waiting for. I'm the novice bear, after all.

My game plan. First identify the leaders of this rally. Short the hell out of them when they break their 50 dma. Look for short-covering rallies and add to the short position.


Current Leader

US Global Investors (GROW) is one that is extended so far past its 50 dma that by the time it crosses the 50 dma it might be too late. GROW has a pretty big intraday reversal today and will stay on my radar screen. The big reversay might have been due to an Investors.com piece on the dangers of buying a stock that is technically extended.

Bottom line is that I'm not going to jump in too early. I'm just going to be ready to jump in with both feet.

Volume dries up in the QQQQ and the DIA

The price and volume in the DIA and QQQQ diverged quite a bit today. This is the first time that I have seen such a large drop off in volume while getting such a large move in price. (Remember, I'm relatively new to the markets.) The volume in the Nasdaq composite and NYSE were not quite as weak, which begs the questions: Who was it that decided that they

didn't want to participate in today's rally? Who are the stock operators that usually trade the q's, the SPY and the DIA? Are they the smart money? Do they know something? Is this just a blip on the radar or a harbinger of things to come? We shall see.

ProShares Ultra Short (QID)

If you didn't know, there are ways to short the overall market without actually shorting the SPY, DIA, or QQQQ. All one has to do is buy the Proshares Ultra Short ETFs.


QID = Nasdaq
SDS = S&P 500
DXD = The Dow

The advantage (or risk) is that the ETFs will move twice as much and in the opposite direction of market it follows. The nasdaq goes down 1% and the QID goes up 2%. I bought some of QID shares on Friday.

Window dressing

Through listening to Tom O'Brien I have come to learn about "window dressing". This is the time when money managers pump up winning stocks in order to make their performance look better, although somewhat artificially. If I'm not mistaken, this usually happens at the end of the month.

I just read a fascinating article by the guys at TradingMarkets.com. They did some back testing regarding the end of the month rallies and came to some very interesting conclusions.