Friday, May 11, 2012

Puke Tops

/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. 

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