Weekly Stock Review: $IDCC

Understanding Support and Resistance for Position Trading IDCC

By Martha Stokes CMT

IDCC recently formed a “compression” pattern. This is a new candlestick pattern where a group of candles indicate that the stock is poised for a sudden move, often a breakaway gap as occurred for IDCC.

The compression pattern is one of the most reliable and lowest risk entries for the automated market.

The entry was before the breakaway gap. As you can see, the stock gapped just above the highest high of the sideways pattern.  As the stock position is held, it is imperative to study the support and resistance levels to determine where it will stall, the risk of a retracement, and where it may encounter heavy profit-taking.

Two factors affect support and resistance levels:

1. Technical traders
2. Fundamental traders

Both have distinctly different areas where they buy or sell.  The strength of support or resistance is relevant to these two very different types of professionals.  Technical Traders are using pure technical chart patterns, often foolishly assuming they can predict a stock action rather than learning to anticipate price action—there is a huge difference.  

Fundamental traders, on the other hand, are using pure company analytics as they project the company profits and stock value correlations. They are thinking very differently.

Below are the primary resistance levels for IDCC.

The resistance that was recently broken through must be confirmed with another tight sideways pattern.  If it doesn’t move sideways and provide a stable horizontal support, then the stock will retrace or correct as short term profit-taking technical traders react to the price patterns.

The next line up is the area where the sideways action should form and is moderate resistance at this time. The 3rd line up is where fundamentalists will react, as this is a yearly high.

Each level of resistance will convert to a support level once the current price moves above it; however, if a resistance level is moderate, the support it provides is not necessarily moderate once the stock has overcome that resistance.

Right now, the stock has moved above and into the moderate resistance area on a daily chart. But the support that that same level provides is weak-moderate support until the stock has formed the next platform, aka sideways pattern.

Not fully understanding the relationship between sideways support and resistance is a common mistake that most traders make. They see the breakaway gap but do not properly evaluate how the stock will react to nearby resistance and how that resistance will affect the current support from the most recent sideways action below that price move.

This is due to the fact that most traders totally forget about the most important traders in the market, the fundamental traders. These are longer term institutional investors of many sizes with varying intentions for the stock.

Technical traders often do not consider how, when, where, and why the fundamentalists are moving into or out of a stock, nor do they consider the fundamentalist resistance and support levels.

Most Dark Pool activity is invisible to technical traders because they do not know what they should be looking for on the charts.  Dark Pool activity is in the stock chart, but it is not what most technical traders expect it to look like.

Learning to read stock charts is more than just finding a candlestick pattern. It is really being able to understand the language of candlesticks. For many retail traders, pure price action is gibberish so they depend too much on price and time indicators, a big mistake if you intend to be consistently profitable with better income than you can make on an hourly wage.

Summary:

There are two factors to studying, analyzing, and interpreting how price will behave at various support and resistance levels.  There are both technical and fundamental traders trading IDCC at this time.  How each approaches their preferred analysis will affect how the stock moves when it approaches resistance levels and how the stock will react when profit-taking or accumulation occurs.

As technical traders, understanding the fundamentalist mindset can dramatically improve your trading for day, swing, and position trades.  Fundamentalists dominate the market, so how, what, when, and why they are buying or selling matters.

For more on Position Trading Techniques: CLICK HERE

Trade wisely,

Martha Stokes CMT

http://technitrader.com

Chartered Market Technician

Member of Market Technicians Association
Master Rated Technical Analyst for Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses

Charts courtesy of MetaStock®.

©copyright 2014 Decisions Unlimited, Inc. All Rights Reserved.

TechniTrader is the Registered Trademark of Decisions Unlimited, Inc.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor; it is strictly an educational service.

Employee Spotlight: William G

Name: William G.

Time with Company: 18 years

Area of company works in: Support / Documentation / Product Development / Quality Assurance

Do you trade in your spare time: No

Favorite part of your job: creating formulas and add-ons

Favorite Quote: “The only true failure is the failure of not trying.”

Favorite Color:  No single color but prefers deep rich hues (i.e.: maroon, navy blue, Sherwood green)

If you weren't working with MetaStock what would you want to be doing: creating/building something.

TechniTrader Weekly Stock Review for MetaStock Users - SYMC: Dark Pools at the Bottom

One of the most difficult things for traders to do is to determine when a bottom has started after a correction is underway.  Many times, traders are still attempting to sell short when the giant lots that use Dark Pools for their orders start to move into a stock to commence the bottom.

Nowadays, true bottoms are started by Dark Pools as these giant-lot investors move in quietly, unnoticed by the intraday, HFT, and retail trader. Their buying power is unmatched by all other market participants.

Although these large lots are invisible on the exchanges, ECNs, and retail broker systems during the trading day, every order for every stock is required by law to be cleared through the national clearing houses.  This data is then sold to Data Feed Providers such as BATS or Reuters or MorningStar, who then sell this collected, consolidated data to other vendors, market participant groups, etc. That means that your End-of-Day charts contain the Dark Pool activity.

Their footprint is there to see on the charts IF you learn what you are looking for.

Dark Pool Footprints: Your Advantage Over HFTs

SYMC has the classic pattern called “Shift of Sentiment.”  First, there is the huge volume spike to the downside with a huge gap down pattern on high red TT Quiet Accumulation bars.  This usually precedes the Dark Pool entries.

Dark Pools use special orders that control the buy zone for their large lot activity.  HFTs are unaware that the Dark Pools are quietly accumulating and continue to sell short for a period of time. HFTs are not human traders but are algorithms that run via a computer, sending orders to the exchanges at millisecond speeds.

Often the HFTs are on the opposite side of the trade at a bottom.  The HFT has to change the algorithm to an upside trigger action once the computer recognizes or identifies the giant lot orders of the Dark Pools.

Most retail traders use MACD, Stochastic, or Bollinger Bands® as their primary indicator.  Unfortunately, NONE of these indicators reveal the Dark Pool quiet accumulation that creates bottoms.  With these indicators, false upside entry signals and false sell short entry signals occur frequently as HFT selling collides with Dark Pool Accumulation as the bottom commences.

Below, MACD shows a buy signal crossover after an engulfing white (aka bullish engulfing) just before the final low. But unfortunately, the MACD crossover signal is a false entry pattern and the stock gaps down the next day. In fact, MACD lags behind price often on this chart. And it doesn’t tell you where the Dark Pools are buying or if HFT action is in control of price. If you had used MACD or its trading system that gives red light/ green light signals, you would have been whipsawed out of SYMC many times at a small to large loss. Decades ago, MACD was an amazing indicator, but now it fails more and more often.

Bollinger Bands compressed at this time, but this indicator alone doesn’t tell you the direction the stock will take next.

In the chart below, later in the bottom development that TT Quiet Accumulation identifies clearly, Bollinger Bands are compressing to indicate a breakout pattern is imminent; however, Bollinger Bands do not indicate what direction the stock will take, or the momentum or lack of momentum behind the imminent breakout.  MACD is neutral, telling you nothing about this imminent breakout.  Both indicators lack essential data you need to know in order to determine what the stock’s price will do next because their formulas use only price data.

Hybrid indicators reveal far more information about who is in control of price AND the direction the stock will take out of sideways patterns such as bottoms.

Summary:  

If you really like the popular price indicators like MACD, Bollinger Bands or Stochastic, then consider adding a leading hybrid indicator such as TT Quiet Accumulation. Otherwise, your indicator analysis will lack the critical information you need to succeed in today’s new market structure where Dark Pools and HFTs control price much of the time.

To be successful in trading today’s stock market structure that has multiple venues, speeds of execution, and vast differences in lot size, investment funds, and specialized orders for each market participant group, you must adapt and use indicators that will reveal the patterns of the most influential market participants.

Without leading hybrid indicators written specifically for the current market conditions where giant lots can move quietly in and out of stocks without disturbing price, you cannot attain the high profits of those traders who are able to detect a bottom early with the correct indicators for doing so.

Learning Center: More on Leading Hybrid Indicators

Trade wisely,

Martha Stokes CMT

http://technitrader.com

Chartered Market Technician

Member of Market Technicians Association
Master Rated Technical Analyst for Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses

Charts courtesy of MetaStock®

©copyright 2014 Decisions Unlimited, Inc. All Rights Reserved.

TechniTrader is the Registered Trademark of Decisions Unlimited, Inc.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor; it is strictly an educational service.

Technitrader Weekly Stock Review: Volume Patterns on VAC

This week, let’s study colored Volume Bars and how to avoid whipsaw trade risk by understanding how volume and volume-based indicators reveal the weakness in a candlestick pattern.

Many traders still rely upon price and price indicators solely, which leaves them highly vulnerable to whipsaw action.  Volume is critical in today’s automated marketplace where 80% of all orders are processed automatically via a computer program set to fill large orders over time without moving price.

On the VAC chart below, the current day is an Engulfing White (aka Bullish Engulfing) candlestick pattern, which is commonly used for entries.  Prior to that candle forming, the stock had two reversal candle patterns where sellers attempted to sell the stock down, but buyers moved in, triggered by the support from the highs of late December.  This is a technical bounce area for this stock.  Professional technical traders are active at this time, and some retail traders may also be in the stock.   This is not a fundamental support level and there is no Dark Pool Footprint, which is a very distinct price and accumulation pattern.

On the day of the Engulfing White, volume is dropping below its moving average.  This is a warning that this stock lacks sufficient buyers.  In addition, TT Quiet Accumulation is showing a red bar as price moves up, which is a divergence pattern indicating a giant or large lot fund is rotating slowly and carefully out of this stock without affecting the price. The Large lots are selling while smaller lots are buying.  This weighs the balance of power to the downside.

In early March in the chart above, a common gap up to a long white candle with an extraordinarily long volume bar is the footprint of High Frequency Trading orders.  The stock did not move up strongly after that HFT action because volume was weaker.

The next day, the stock forms an indecision candle pattern, as seen in the chart below, rising slightly above the previous high and settling back to the close with much lower volume.

The next day, in the chart below, the stock moves up about 1 point on rising volume but with more rotation showing in Red TTQA. The stock moves up to the weak resistance level and pulls back before the close of the day. Volume is still below its average.

At this point, the retail trader has less than one point gain, which is insufficient for a swing trader to be profitable when all the costs of the transaction, time, fees, etc. are factored in.   However, since the stock moved up, greed settles in.  Most swing traders would hold, unaware that volume is insufficient to drive price up, that the resistance just above is more substantial than it appears due to the weaker volume AND due to the sell side pressure of larger funds rotating out as price moves up.  But most retail swing traders would be excited and would choose to hold.

Here is what happened next: The first small black candle in the chart below wipes out half of the tiny profit. This tends to make retail traders try to hold, hoping the next day the stock will move up again as it did before.  Sure enough, the stock opens at the prior close but then falls further that day. The following black candle wipes out all the remaining profits.  Most swing traders trade runs for 2-10 days.  But look at volume. Red Volume is rising. The larger lots are taking control as fewer small lot buyers are moving in.  The following day is a huge down day with a 2-point loss. Exiting the following day either means a 3-point loss or contains the loss to about 2 points. The risk to reward ratio was inverted, the large lots were selling into the bounce, and smaller lot traders had a whipsaw trade.

This is why most retail traders have chronic losses with intermittent profitable trades.  Volume and volume-based indicators are critical. Not using volume means you have no idea which side of the transaction the larger lots are trading.

Some retail traders would argue that they would have gotten out of the trade on the first day, or the second day, but in reality most do not.  Also, if you are taking 25 cents off the table and thinking you are profitable, think again.  With fees, costs, and your TIME, you are losing money or breaking even.  How much is your time worth?  Minimum wage?  Calculate the time you are spending including your time going to seminars, webinars, and searching the internet for answers. Then, add it all up.  Most retail traders are losing money by setting their profit expectations too low.  

For information on Volume Indicators that lead price action: CLICK HERE

Trade wisely,

Martha Stokes CMT

http://technitrader.com

Chartered Market Technician, Member of Market Technicians Association
Master Rated Technical Analyst for Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses

Metastock® Partner

© 2014 Decisions Unlimited, Inc. DBA TechniTrader®. All Rights Reserved.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor; it is strictly an educational service.

"ETS 2.1" - One of My Favorite Trading Systems

There are literally thousands of trading systems and methodologies out there.   It can be challenging to know which ones would be a good fit for your trading style.  It’s always a good idea to have multiple indicators or systems that complement each other, rather than rely on one single signal.  Getting “agreement” from several systems can bolster confidence in your positions, and give you greater clarity.  One system I have found to be particularly useful as a confirming call is the “ETS 2.1 Trading System”. 

ETS, developed by Michael Mermer, is a trend-based system, and has been highly rated from many sources.  In fact, Futures Magazine rated it as one of the “Top Ten trading systems of all time”.   On the developer’s website;  traderssoftware.com, they boast some impressive calls in market direction, including a chart that shows how ETS called a clear “Sell” signal before the “Flash Crash”.     ETS is also quite versatile.   It works on a variety of instruments, including stocks, futures, indices and forex, and performs well for both daily and intraday charts.   Personally, I like to use the Expert Advisor and Expert Commentary to help confirm a position and set profit targets.   However, the best reason to have the ETS 2.1 system is that it is so easy to use!   Here are a few examples:

Here you can quickly see the ETS buy and sell signals on a chart of the S&P 500.  The commentary window shows the suggested stops, and profit targets for the buy signal in September of 2013.  At the bottom of the chart you have the ETS Trendwatch indicator that gives you a good way identify the overall market trend.    The Trendwatch  indicator also merges nicely into any template with your other trend-based systems.

Here is the ETS template on the Nasdaq 100 using 30 minuet bars.  Again, it does a great job spotting the trend quickly, and confirms it with the Trendwatch oscillator.    With its automatic and logical stops, it quickly gives you starting point to keep your trading efficient.  ETS keeps you in the trade throughout the trend.

Here is one more example using the ETS on light crude (continuous).  You can see the initial profit target (107.63) as shown touching the upper horizontal line.  This obviously worked out to be a great exit point, even though the price continued to reach higher over the next few weeks.  If you had "held on" longer, you would have crossed below the 21-day moving average, and ridden through a zone of sideways price action, until ultimately getting a Sell signal a few weeks earlier.  This is a great example of the intuitive the profit targets in ETS.

Altogether the ETS add-on system includes an Expert, two Explorations, two Templates and five System Tests.  There are optimizations available as well.   ETS is a proven system and its one that I am glad to have in my trading tool set.  This is one add-on that every MetaStock user should at least try.  I think you will find it useful in confirming your positions and making you a more efficient trend trader.

Diverging Divergences

What is a divergence?
In technical analysis, a divergence occurs when two values that normally move in the same direction fail to do so.  An example is when prices are making higher highs and the Relative Strength Index (RSI) makes a lower high.  Other indicators can be used with similar results. When these divergences occur, the prices usually change direction and follow the indicator.  As such, a divergence is usually a good predictor of imminent price action.
The MetaStock formula team frequently receives requests for formula to identify divergences.  However, this is a visual pattern and a formula must base all signals on mathematical conditions.  Therefore, to create a MetaStock formula for a divergence, we must first precisely define what a divergence is.
Referring to the original definition I first presented, a divergence has two parts:
• Price is making a higher high
• indicator is making a lower high
A divergence then requires two comparisons.  A "high" in the prices is greater than a previous "high" and a "high" of the chosen indicator is less than a previous "high".  The highs referred to are not of a specific bar but peaks in normal up and down movement of the chart.  Now we have the dilemma, what is a peak?  On this definition rests the entirety of the formula.  Consider the chart below:

Points 1 and 2 show places where the prices reached a top.  However, are these points one peak or two separate peaks with a low between them?  If they are one peak, which line points to the peak?  The answer to that questions is personal opinion and will be different for different traders.  For example, when a 5 % Zig Zag of the close is used, the peaks and troughs are marked this way:

If a 1% zig zag is used instead, the peaks and troughs change to this:

If the chart is focused just on the March / April region, we can observe a second issue.  The chart below added a 1% zig zag of the High (the blue line).

While the peak on 7 March 2014 is the same with both lines, the other peaks are not.  While this is just the difference of a few bars, it can affect if a divergence is found.
Once the peaks of the prices are chosen, the peaks of the indicator must be identified.  This can be done two ways:
• apply a calculation to the indicator similar to the one used on the prices
• take the value of the indicator at the time of the prices peak/trough
The chart below has added a 14-period RSI with a 1% zig zag.

Notice how much more volatile the RSI zig zag is than the prices.  If we were to just look back at the two most recent price peaks and indicator peaks, the points on the chart would not be aligned.  In this case, a zig zag of the indicator is not the best choice.
An alternative is to look at the value of the indicator at the time of the price peaks.  Consider the chart below:

The peaks of the zig zag of the close are marked with red lines.  the peaks of the zig zag of the highs are marked with blue lines.  I have drawn short trend lines showing the change in the RSI value between the price peaks.
Both of the sets of peaks show an increase in price from one peak to the next. If we were using the Highs, a formula would say there was a divergence.  However the Close actually co-insides with the peaks in the indicator but does not see a divergence as the RSI is also increasing.  Which is more accurate?
Perhaps a better solution would be to revisit the zigzag on the RSI.  Instead of using the RSI itself, let's smooth it first with a 5 period simple moving average:

Now when a 1% zig zag is applied to the moving average, it corresponds very closely to the zig zag of the highs.  When the peaks are compared to the peaks of the highs, both are increasing so no divergence is found:

Would this be a good way to look for divergences?  That is a matter of opinion.  I like the zig zag of the highs because it finds the visual tops of the prices.  By smoothing indicator I could make a zig zag work on the value of the indicator peaks.  I prefer that to take the value of the indicator at the time of the price peak.  Indicator peaks are seldom at the same time as the price peaks and a divergence is suppose to compare tops of indicators to the tops of the prices.
Here is a formula based on above:

plot:= H;
Ind:= Mov( RSI(14), 5, S);
zp:= 1;
sig:= Peak(1, Ind, zp) < Peak(2, Ind, zp) AND
Peak(1, plot, zp) > Peak(2, plot, zp);
Sig=1 AND Ref(sig=0, -1)

The plot to use for the prices, the indicator to search for divergences against, and the zig zag percentage are all assigned to variables.  You can change those as desired.  Through experimentation, you may find a better set of values for identifying divergences.

TechniTrader Weekly Stock Review for MetaStock Users: “Facebook” by Martha Stokes CMT

MetaStock® SPRS Series - Week 169 – May 2, 2014 - MetaStock Spatial Pattern Recognition Skills Series written by Martha Stokes CMT

“What the Stock Chart Patterns Revealed Before the Facebook Earnings Report”

Facebook reported a better than expected earnings report on April 24, 2014, yet the stock fell in price that day. As technical traders, what is in the stock chart that could have warned you that this stock was not going to run or gap up on this news?

Let’s take a look at FB to see what the stock chart patterns indicated prior to the report.

Many traders and investors still use price indicators as their primary indicators. However, due to the massive internal changes to how the giant lot and large lot institutions buy and sell stocks, using price indicators will not give you the vital information you need, especially before an earnings release date.

The stock charts will expose what is going on behind the scenes, beneath the everyday news you read on the internet.  What you will find in the candlesticks and quantity indicators, such as TechniTrader’s Volume Accumulation and Flow of Funds Indicators, are most important to study.

The giant mutual and pension funds control so much of the outstanding shares of publicly traded stocks that to ignore their presence, or lack of it, is to put your trading capital in peril.

When we use these quiet accumulation or distribution indicators, it is obvious instantly that the giant funds started quietly moving out of Facebook as early as January of this year.  

The giant funds that use Dark Pools control price in ways that can be confusing to traders.  What they do is carefully construct an automated order that slowly sells the stock over many weeks. This allows the stock to actually move up further, which is their intent as they usually plan to sell as the stock rises to its final high prior to any downtrend.

Downtrends are caused more by a lack of giant fund buying combined with giant lot selling at the same time.  Larger institutions also start selling, and then the last institutions out of the stock are the smaller funds mangers.

Long before Facebook was to report this month, back in March, the institutions were aware of a critical piece of information. FB was going to have LOWER quarter-over-quarter revenues, from 2.5 billion in December to 2.2 billion this quarter.  That is a significant decline in revenues.  The CFO was able to increase earnings, which made it appear to the average investor and most news media on the retail side that the company had a stellar earnings report.  However, the decline in revenues is a huge warning that FB’s strategy of mobile advertising is weakening and may be at risk of further decline.

A clever CFO can move expenses to the Balance Sheet, converting expenses such as software development to be an asset rather than an expense as it would normally be, as an example. When this is done, expenses are perceived to be lower by average investors.  This doesn’t fool the institutions who are well aware of this technique for making earnings look better than they actually were.

All of this is legal, which means the corporation must pay taxes on those adjusted increased earnings, which also will affect the next quarter.  What is happening for now is professional short term traders are taking some quick profits on the earnings news.

The institutions are showing a “No Confidence” vote for FB and have been for several months.

If you look at the candlesticks carefully in the chart below you will see that the sell side dominates, even without HFTs interfering much.  

HFTs were attempting to move price up periodically with huge volume to the up side; however, the dominance of the giant lots overwhelmed even the High Frequency Trader or HFT action.

Resource Information:

I invite you to learn about Relational Analysis™ which is the evolution of stock analysis and technical analysis.  It incorporates the 4 primary analyses used today by the most important Market Participant Groups, which are the Sell Side Institutions and in particular the Buy Side Institutions.  To view a no-cost video on Relational Analysis CLICK HERE.

Trade wisely,

Martha Stokes CMT

Chartered Market Technician

Member of Market Technicians Association

Master Rated Technical Analyst for Decisions Unlimited, Inc.

Instructor and Developer of TechniTrader Stock Market Courses

For additional training visit http://technitrader.com

This Stock Discussion and Training Lesson is sponsored by TechniTrader.com

MetaStock® Partner

©2014 Decisions Unlimited, Inc.  All Rights Reserved.

TechniTrader is the Registered Trademark of Decisions Unlimited, Inc.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader and its instructors or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues.  At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.