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[Please note this post is from 5/30/07; work and life intervened, and I’m publishing it a day late– ed.]

Today I noticed a pattern forming on the Qs, started drawing lines here and there, and lo and behold, a beautiful example emerged.

I’m talking about the Three Little Indians setup popularized by Linda Bradford Raschke (also known as Three Pushes to a Top, Three Drives, Three Waves to a Peak, Three Monkeys on a Branch, etc), and also the concept of the Wolfe Wave, a subset of Three Little Indians which has more particular rules, but which in return provides clear entry and exit targets.

Three Little Indians

Around midday, I was looking at the smooth swings the chart of the Qs was making as price methodically plodded higher. It’s gotta run out of steam at some point, I was thinking. Suddenly it occurred to me that I was looking at Three Little Indians:

Three higher highs, three higher lows. Time to watch for a double-top and failure.

Then I got to looking closer, saw that the second higher low was below the first peak at “1“, and realized I was looking at the elusive Wolfe Wave.

Wolfe Waves

In Wolfe Waves, the three highs are numbered according to the thrust, or “wave”:

Wolfe Waves have more stringent requirements than Three Little Indians. I’m no expert on them, so do your own homework, but on the chart above the following would be necessary:

• The thrusts must be evenly spaced, time-wise

• High “3” must be higher than high “1“

• Low “4” must retrace to below High “1” but not beyond Low “2“

• And so on… (to quote Vonnegut)

So, realizing we have a Wolfe Wave, we draw lines through 1-3 and 2-4. These lines should form a rising wedge in an uptrend and a falling wedge in a downtrend. We see on this chart they do:

Now the Wolfe Wave strategy says that point “5” typically is an exhaustion spike which exceeds the 1-3 trendline. A short could be entered on the failure back below that line. We see on the above chart that the price went ahead and walked up to the point of the wedge, still a good place to short.

What are we shooting (shorting) for? Wolfe gives us a target: The extension of a line between High “1” and Low “4“:

Enough already. What happened?

At this point one could theoretically flip and go back long (the primary direction of the day, after all), with an appropriate stop loss, of course. That would have worked to perfection today:

Again, I’m not an expert here. Caviar Emperor, as the Romans say.

As planned, the previous trade got stopped at 46.60 this morning. A surge down to 45.20 would have been so nice, but, c’est trading. Instead I’ve got either a quick, acceptable swing trade or a very nice extended daytrade behind me, depending on who I’m telling the story to.

Where are we now?

We’re in the middle of some significant sideways action. Remember, in the book of Dummy, volume at price equals support and resistance. The direction we break out of this range is very important.

After that heavy “down” volume a couple of days back, I’m leaning towards shorting (I always seem to be), but I need the math to back me up before I do. And, despite all appearances to the contrary, I’d be content to go long as well, given an appropriate setup.

I used to enter a swing trade based on the high or low of the previous day. My current method looks for significant movement in the direction of the entry, which may or may not coincide with that previous bar’s extreme.

The numbers I’m coming up with tonight show me I likely won’t be taking a trade tomorrow. I need about 46.10 to get short on the Qs. About 151 on the Ps, 480 or so below the shooting star on GOOGle oogle oogle, and about 112 on my old friend AAPL. What, you thought I forgot Apple?

Long? I really need a break and pullback on any of ‘em.

‘ats it for now.

• Supper Tonight: Leftover Strawberry Pie and Bud Light
• Watching: Season finale of "House"

I want to talk about stocks, but first:

(You know I gotta do that.)

My daytrade short of the Qs, held overnight (see last post) has turned into a screaming swing trade:

Best range and volume since our little Feb-Mar adventure, no?

To quote the famous movie- dude… sweet…

Deep in the money is the nicest place to be, but also the scariest. This is where nerves can get frazzled and we can panic-sell (or panic-cover, as the case may be) out of fear. We traders know that the fear of losing a gain trumps the fear of taking a loss- we’re much more familiar with the feeling of taking a loss. Oh yeah, another loss, Zzzzzz…

So, in this fortunate position, it is more important than ever to stick to our plan, our method, our rules.

The method that got me short on this one has me looking at two buy-stops to cover: first, on an extension of the selling down to about 45.20 (oh please, oh please); otherwise, on a rebound to 46.60, at which point I may actually flip and go long, depending on the day’s action.

That’s it. Nothing to do now but wait and watch. Cheers.

(That’s a little Cool Hand Luke humor for you gen X’ers).

I am presently short the Qs. There’s a bigger story to do with the overall market, economy and geopolitical issues, but this note is just about what happened today:

The Qs opened with a slight gap up, then backed down a bit on diminishing volume, then ran up above yesterday’s high of 47.28. So much for the 2b on the shorter chart. Anyway, after the break to the new high, we got some noodling and retracing, until right at noon when we got a hammer right at yesterday’s high (support). If there was significant buying waiting to come in, this was its chance. We should have seen a hard thrust up to a new high.

Instead, we got - nuthin’. A little climb away from the hammer, then dribbling back down towards 47.25 again. With multiple time frames showing overbought, and then this hesitation, that was all the excuse I needed. I got short in the high 47.20s with a stop above the day’s high.

Then I had to go to work. I didn’t get the chance to close the position by 4pm EST, so I’m riding a short into tomorrow. Not sure I would have closed it anyway.

Now let’s see if there’s some follow-through.

About a week ago, I showed a chart of AGP that was a potential swing setup- it was oversold and throwing off bottoming hammers. Yesterday we got the first “higher high” since that post, and it turned into a nice short-term trade entry:

With the bottom of Friday’s hammer as a stop, that’s about a 3R (300% of initial risk) gain in 2 days. In other words a thousand shares at $24,600 would be up about $1800, or over 7% total, in those 2 days.

A more aggressive way to play these is to set the entry bar’s bottom as the initial stop, then size your position accordingly. That would result in an entry of 24.60 with an initial stop of 24.30, or an “R” of 30 cents. Sizing using that method would have you up over 6R in the ensuing 2 days.

Do We Have a 2b Top On QQQQ?

Vic Sperandeo coined the term “2b Top” to describe a classic double-top, but where the second high momentarily spikes above the first one. Check out the Qs:

An aggressive short can be taken upon the failure back below the first high, whereas a more conservative trade would be to enter at the break of the near-term low between the two highs.

This method also allows for an initial stop at the second high. Personally I’d be inclined to set my stop a little below the second high, because if this pattern plays out, the second high should never be revisited during the trade.

Some weeks ago I was tagged by Craig at the Taz Trader Blog. Just saw it. Sorry, man, I’m truly that far behind. I have sleep scheduled for some time in July.

Here are my responses to the tag:

My Five Obsessions:

• Trying to find the balance between overly permissive and hypervigilant on the constant highwire that is parenting (and no turning back or redos!).

• Trading. Duh.

• Hot Coffee.

• Cold Beer.

• Motorcycling.

• Bonus #6: Faster horses, younger women, older whiskey, more money (that’s an old Tom T. Hall song for you young people).

Five Reasons Why I Blog:

• Handy way to keep from having repeat my rants. I just give out the url.

• Somehow, getting stuff out of the attic (points to head) and onto paper, er, pixels helps to sort it out. Keeping it all in makes me insane.

• I learn. It seems like I share an ounce of my questionable experience with others and get a pound of clear thought and good wishes in return.

• It’s cathartic. Hard to explain, but somehow it really is. I’m sure others will agree.

• Chicks dig it. Yeah, the other guy may eat caviar and have a Learjet and a Ferrari, but I’ve got a bucket of chicken, a six-pack of beer, and DummySpots!
  [note- editor is well aware that Trader-X has a blog AND a Learjet and Ferrari, darn him to heck]

***

That’s all I got. It’s probably too late for me to tag anyone who hasn’t been already, so please consider this an open tag to YOU!

Stockblog, stockblog, stockblog. I keep telling myself that. But you just can’t help noticing things…

All the libertarians (getting to be an ambiguous term… I prefer the more specific “Anarcho-Capitalist”, see Bill for clearer explanations, or Wikipedia, but Bill is more entertaining) who had hoped Ron Paul would at least make a ripple in the scum-covered pond of sewage that is national politics, well, that hope ended with the collective harrumph echoed across the nation during the most recent debate when he tripped over what may have been a valid point and instead produced a sound bite that allows him to be portrayed holding hands with Rosie O’fuckingDonnell chanting, “It’s all our fault, it’s all our fault.” That’s not what he meant, but that’s irrelevant now. It’s how it sounded, and it gave Rudy a bit of a “Senator, you’re no Jack Kennedy” moment to run with. Paul is toast.

And BNJ, in this post over at CynicalNation, puts a spotlight on the blatant facts which will eventually lead to the atrophy of John Edward’s chances. We’re a pretty ignorant bunch, but his lies are insulting to anyone with the independent thinking ability of even the average third-grader. Although the third-graders would probably vote for him because his wife has cancer and that makes them feel sad for him. Plus his hair is so pretty.

I have a running bet with a buddy at the hospital that Obama will have a Howard Dean moment and vanish from the running like… Howard Dean. I’m not sure when that moment will be, or under what circumstances it will unfold, but I have a Griff’s Hamburger coming when it does.

(By the way, I have another hamburger bet that Paris Hilton won’t serve one day in prison… the news today- that she is to serve “half” the sentence, 23 days, in a soft fuzzy place that’s “sort of” like a prison- may mean that neither of us wins).

Politics nowadays is a great big farce, not unlike healthcare, which creates diversions about payors and affordable insurance while in the background it quietly funnels hundreds of billions of your tax dollars to drug companies and white collar millionaires. Red Herrings and Straw Men everywhere.

One political “side” offers to get us back to when God was alive, when everyone worked for GM or Ford or IBM, and when “the country was strong.” The other side promises to pursue the “ideal” of realizing the dream of the hippies, creating a land where we all wear fig leaves, live in adobe houses, and get a check from our benevolent paternalistic government once a month (a dream which, if you think about it, makes Santa Claus the perfect president).

The truth, of course, is that neither of these possibilities exists. Our society is following the historical cycle that empires and democracies follow, with minor deviations from that path along the way (still well within the Bollinger Bands of history, we stock types might say). Following the Kyklos of anarchy, monarchy, tyranny, aristocracy, oligarchy, democracy, rinse and repeat.

And somewhere around the 60s, around JFK, around Viet Nam, and LBJ and RFK and MLK and Jimi and Janis and Jim. Medicare. Nixon. Fiat money. OPEC. Stagflation. And on and on. Somewhere back there, within just a short decade or so, our society jumped the shark.

And the next President, or perhaps the one after that, will preside over a country which, after all the years of milk and honey and entitlement, begins to suffer the massive hangover of the consequences of its citizens’ collective decision to ignore reality for generations, the consequences of 300 million people looking left and right for someone to save them, but wholly without the ability to look in the mirror.

Whew. Time to switch to decaf, I suppose.

This one’s from a discussion in the preceeding post’s comments:

Amerigroup (NYSE: AGP) is a “Managed Healthcare Company” which serves people who “receive healthcare benefits through publicly sponsored programs”.

This stock has been taken out back, shot, stabbed, run over… then backed up and run over again. The little hammer from today (lower right corner) may give us a quick swing trade. Let’s watch.