I couldn’t help but notice that CVA, one of our Spikers picks is a variation of the 1,2,3 Bottom pattern that I like. I call this pattern the 1,2,3 Lower Bottom, or LB. Since pt #3, or the second spike down closes below spike #1, my rules won’t let me buy until it reverses back and closes above the low of the spike #1 bar. That condition was met with the last bar’s close, so various entry strategies can now be implemented. The pattern would be voided if CVA closed back below the spike #1 close, or around 16.60.

I like to trade the bond ETFs–TLT for long 20-year and TBT for short 20-year. They form trading set ups right out of the text books, move slowly enough so you can anticipate the set ups, follow supply and demand principles, and aren’t subject to stock risks. In fact, they usually go up in times of stock stress and down when stocks are in a bull run. The only real draw back is that they are expensive and you need a lot of shares to make any money; nonetheless, I trade them a few times each quarter just to stay in shape.While the 1,2,3 Bottom set up is found on all time-frames from monthly to 5-minutes, the longer term ones are rare and generally indicate a more substantive move. After a 14-week decline, TLT is forming a classic 1,2,3 Double Bottom on the weekly chart. The first spike happened in early Jan, then there was a bounce to the declining 15 week EMA, and the second spike down on bullish divergence found support just under 90. This week it looks like we will close strong in an engulfing pattern so the set up will complete with the pivot above the second spike. The early buy point was a daily close above the second spike, or around 90.45. TLT has now rallied for 3-4 days, so new positions should wait until it retraces to the daily rising 20 EMA.

Bollinger Bands, aka Volatility Bands, and Alex’s 2-day Force Index, are two of my favorite trading tools. Bollinger Bands measure volatility, or price range up or down from a baseline (20-day SMA). I use them for a variety of things–squeezes, short-term overbought/oversold, profit targets, and an indicator of potential trend change.The market’s recent decline is a good example of how the measurement of volatility can help us traders. When the market plunged in late January, the BBs expanded in opposite directions indicating a violent move. The lower band led price down, while the upper band expanded in the opposite direction as volatility increased. The upper band traced above the 115 for several days, eventually turning back toward the lower band as volatility dried up. At the same time, price bounced, then made another plunge ending with a penetration of the lower band, but a close above it, accompanied by a selling climax measured by FI. The end of the move was foreshadowed when the bands stopped expanding away from each other and started contracting.The more I use the 2-day FI, the more intriguing I find it. Notice that when the SPY was in a bull move, each time there was a retracement, it ended in a FI spike, or short-term selling climax. Interestingly, the deepest spike was at the start of the correction, which indicated we were headed for something much bigger than our previous retracements. Notice that another smaller spike (also indicating bullish divergence) marked the end of the decline. I also marked the mid-February bounce forming a higher low. This bounce was the perfect set up for another move down. The tip-off that we were going to continue down was the inside day bar (on the right in the rectangle), a handy tool in itself.

A Spike member asked me how I find the 1,2,3 Bottom patterns and Alex suggested I post my reply.I find it nearly impossible to come up with an accurate screen for this pattern, so I do it the old fashion way. Because I’m a Mac guy, I use an old charting software system built for Mac computers, and a database of about 500 large cap and ETFs. I’m a short-term swing trader and use 2-day RSI and 2-day FI to measure short-term oversold and short-term overbought. I buy weakness and sell strength, so I look for longs if the S&P is oversold and shorts if the S&P is overbought, and rank all my stocks by their 2-day RSI and look for longs if the 2-day RSI is under 20 and shorts if it is over 95.Then I cycle through each daily chart looking for reversals or other set-ups. It usually takes me about 20 minutes to go through them all and I do it once a week or so. I often trade these 123 Bottom patterns (if the weekly charts are favorable) and usually hold them for a bounce to the downtrending 20 day EMA. In the case of NSC, I took profits very quickly because I don’t trust this market and I’m going out later today and don’t want the profits to slip away. I did the same with DIS, EWZ and KO, but still hold GS with a tight stop. The set ups for EWZ, DIS and GS were variations of the 123 B, but KO was a failed break down with major bullish divergence (a set up that Alex has described several times). I picked them all up by cycling through my 2-day RSI stocks that were below 20. I’m particularly careful these days because of the chop caused by ultra high correlation between the dollar and stocks, so I take profits quickly.If the market holds together, I will revisit these stocks in a few days to see how they handled the resistance from the downtrending 20 EMA. If they consolidated, or the 8 EMA crossed up through the 20 EMA, I’ll look for a continuation trade. If they fail at the 20 EMA, but hold support at the bottom of Spike #2, I’ll probably take another shot long if the MACD strengthens. If they crash through support at Spike #2, then the game reverses and I’ll short them.

I thought I would post another of my 1,2,3 Bottom trades. It shows the 1,2,3 Bottom forming over a longer period than usual, and above the 200 SMA. The ones that form above the 200 SMA seem particularly successful. On the weekly, the decline retraced 60% of the original up move, and then settled at 50% on the second downturn. Finding support at the 50% retracement and forming a higher low, while the MACD-H and FI tick up provides further confidence. UGL is a 2X ETF that tracks the price of gold, similar to GLD. The first target is 50, and then the old high at 57. I may add to the position if we consolidate around the 20 EMA for a couple of days without losing much ground. I actually tried to enter this trade 5 days earlier and got stopped out, but when price slipped and 2-day FI didn’t, I decided to watch for another entrance. This one is profitable.–Grant CookeSustainable Energy Associatesgcooke@sustainableenergyassc.com925-989-7117

The market has had a mighty run, but many of the stocks in my database are forming my favorite reversal pattern–the 1,2,3 Top. A couple of folks have asked me about it, so I thought I would post some charts as a refresher. Most of the ones I’m currently trading all have huge bearish divergences on the weekly charts, greatly contributing to the pattern’s reliability.For those not familiar with the 1,2,3 Top (or 1,2,3 Bottoms) the pattern is based on the classic market dynamic that almost all significant tops, or bottoms, consist of 3 moves–# 1 is an initial thrust that ends a trend, followed by #2 a pullback as the smart money takes profits, then #3 is a retest of highs as late comers want another shot at glory. The pattern completes as price trades below #3 and forms a pivot. Short on the close of the move below #3, and the stop is above the high of #3, or #1, whichever makes the most sense. The lowest risk is to short on the close below the #3 low, so you need to adjust the number of shares traded based on money management. I particularly like 1,2,3 Tops because they tend to trap late buyers who quickly sell their shares when they realize the up move is failing. Look for lower volume on move #3 and increasing volume on the move down.As I cycle through my database I’m seeing many stocks in various stages of the pattern. Traders say that when the averages are forming a top, 1/3 of the stocks will peak before the top (probably now), 1/3 will peak along with the averages, and 1/3 after the averages peak. So, I’m looking for a host of 1,2,3 Top opportunities over the next few weeks, or short trades after half-hearted bounces as the stocks correct.–Grant CookeSustainable Energy Associatesgcooke@sustainableenergyassc.com925-989-7117

Lately, there has been some chatter about a dollar rally; and Alex mentioned that he had sold his gold and was now looking to short foreign currencies. SInce I agree, I went looking for an easy way to short the precious metals and oil. Since I don’t know a thing about futures, I pulled up my ETFs and settled on a couple. For oil, I went with DUG, which is the inverse of the oil stock index, a nice clean way of shorting the big oil producers. For the precious metals I found ZSL, a ProShare Ultra ETF that is the inverse of the price of silver (which would be SLV for a long silver trade).This ETF is priced on the commodity, and in this case, a trader who is long the ETF is short the price of silver (not the mining stocks). There’s considerable concern that these commodity based ETFs are unsound and not accurate. They have had problems, and don’t work well for long-term holding; however, I find the ones like ZSL that trade over a million shares a day, easy to buy and sell with decent spreads and just fine for short-term trading. A word of explanation about my indicators. I prefer short-term trading, so I use a 2-day RSI, coupled with a 2-day FI and a 3,10,16 MACD, and look to hold for 2-4 days. I find this version of MACD very responsive and very good at showing profitable divergences on the daily charts.

Steve is our newest Spiker. His presentation on Squash Bottoms received the top rating at the 2009 Spike Reunion.Remember last Spring when we were waiting for an interim bottom? Bullish divergences were showing up but we kept getting false bottoms that led to whipsaw trades. Now it feels like we’re at a similar juncture, waiting for an interim top while the bearish divergence signals continue to become more evident. After observing the SPX then versus now, their similarity became apparent. Back then we had a triple bullish divergence, similar to the triple bearish divergence now. That was followed by an exhaustion move down which led to the current bull run. The divergence pattern seem to give an alert or warning of change, but the exhaustion move was the pivot point that led to a solid tradable run starting with an immediate explosive move.Is the current SPX MACD-Histogram peak forming the last gasp before a significant drop? Could it be a pivot point?This market is ruled by exhaustion moves, sometimes with an additional punch down – orchestrated by the market makers. Stocks get shorted like there is no tomorrow, down to support, pull up slightly, then they drop the bid and run the stops so the big boys can get shares on the cheap for the next leg up. This pattern provides a very profitable opportunity IF the impulse stays blue thru the retest as shown in these charts:So if the inverse holds true in consideration of the SPX and this latest MACDH peak in fact develops into an exhaustion peak then we should see a subsequent retest of the high without the impulse going green, followed by a hard sustained drop?Happy Thanksgiving,Steve M.

For the last year or so, life’s exigencies have driven me away from stocks and toward the ETF market. My trading these days is greatly reduced and probably 80% ETFs; and I am more and more pleased with the results. As most know by now, ETFs come in all flavors and power, and I’ve settled mostly on the ProShares 2X.There is one trade I take routinely and since we don’t recommend commodity trades for Spike, I thought I’d mention it in the Blog. I like to trade the long bond with the opposing ETFs, TLT and TBT, or the 3x ones TMF and TMV. It’s a simple trade–simple is good–I buy either ETF at the outer Bollinger Band and look to sell a couple of days later around the 20 EMA. I use the 2 RSI as a trigger, so when it gets into oversold territory, I get ready. While I use the 3X ETFs–TMF and TMV (they have crummy volume so use limit orders) to trade, I use the TLT and TBT for the pattern.Every once in a while, the bond goes on a major trend trade as measured by the ADX (see fall 2008); at that point I try to trade the trend. But the rest of the time, the bond goes back and forth from overbought to oversold without much fuss. I usually get 2-3 of these counter-trend trades a month at the extremes. The gains average about 3-5% on the 3X in 2-3 days, with a low-risk, high percentage average (use tight stops). No one will get rich on the trade, so think of it as cigar and wine money.

This message came from Susie W – a Spiker based in Mexico.