|/tf cuts through top, taking out stops, then dies|
Today's trade is a new pattern I'm watching for: the Supply Umbrella. It's simply an attempt to go outside in -- or rather, nail the top.
The key elements are:
1) Do you know where resistance is? In this case, tf topped out at the same place 794.5 -- twice yesterday... so we knew this would be an important level.
2) Are you watching the overall market? Many signals were down -- with JPM and other markets weak off the bat. So when /tf went straight up at the bell, no doubt this caught many people off guard.
3) Watch your volume. What we want to see at the top is a Puke Candle. The huge volume spike as /tf cuts just above yesterday's high by 2 ticks was probably algos taking out stops. Suddenly - there's no more stop-hunting and no reason to continue higher. The Market hurt those who were impatient. For the rest of the day, /tf lazily gave back most of the move.
You can also play Puke Candles as a bottom. Again -- they work better when the Market Signals are strong.
4) Recent Patterns. This is a new idea. But essentially, the market is always changing things up. For the past few days however, the market has tended to dip at the open, rip around 10:30 - 11:30 (when Europe closes) then give most of it back). The market changed up a little by simply ripping right from the start and dipping premarket -- but the down-up-down move was the same. You can sometimes anticipate the same pattern repeating for a day or two... but eventually -- and suspect by Monday the market will do something new.
This entire dip and move back to previous resistance -- I'm calling it the Supply Umbrella pattern. It's a U-shape that moves all the way to an area of supply -- plenty of sellers were willing to exit at the top. Lots of supply.
Finally, as a bonus, I am trying to watch call buying activity to see if I can find stocks that might be under accumulation by institutions. The only name I bought based on this activity right now is FIO. There was a rumor DELL would buy them. However, there was call buying days before the rumor and it did close up 4.5% today. So watch FIO. You should follow OptionsHawk on Twitter as he provides more ideas.
Well, good luck and enjoy the weekend. Maybe it won't rain.