3D Trading

While the market action this week has been very positive up to this point, I've mostly abstained from trading as I wait to see how the divergences that appeared last week develop. As of now, it appears that last week's distribution might have been the perfect bear trap to roast the few souls brave enough to short this runaway pomo train, but I still remain skeptical that the markets can keep making new highs at these levels without a more substantial consolidation. I will continue to mostly sit out like some hippie protestor railing against the system. (However, like a true hippie, i'll take pot shots at this market if the right trades present themselves.)

One of the ways that I separate the ok setups from the really good ones that seem like freebies is by making sure that the I get high probability setups on multiple time frames. Just like our eyes are able to assimilate two different pictures into one 3D image when watching a movie, being able to have two charts confirm the move on an equity is akin to trading in 3d while other traders are stuck in the 2d world.

(its science)

On Tuesday, a trade that made sense on multiple time frames presented itself as Hecla Mining (HL) attempted to find support near its 100 day moving average. While this average isn't followed as closely as some of the others, or maybe because of that, it often supports a stock that slices through the more heavily watched 20 and 50 day moving averages. While I normally will not touch a stock that has been in a free fall until it has a bullish candle formation that confirms a bottom may be forming being able to analyze multiple time frames gave me the advantage of an early entry on a possible bottom.

As we zoom in to the 5 minute chart, we see that HL spent the entire day forming an inverted head and shoulders pattern, and was able to break out of it just before the close.

Having this bullish pattern confirmed gave me the confidence to go ahead and attempt to catch the knife and take a trade on HL. (It also helped that some of the other great traders in our Stockguy22 virtual trading floor were beginning to eye a bottom on silver as well. /hat tip to Capt. Kirk)

Obviously looking at today's action, the trade has been a success so far, and sticking to my plan of taking quick profits I've already scaled out of 2/3's of the trade during today's 8% move. I will continue to scale out at higher levels, but will also keep an eye on new setups on a pullback as it looks like some of the precious metal stocks should get a decent bounce into February.

One other 3D setup I've been watching develop this week is in Morgan Stanley (MS). MS had a nice move last week off of their earnings report, but has performed poorly this so far this week along with most of the financial sector. However, it has found support just under $29, which was recently a level of resistance. MS is still clearly in an uptrend, and setups up nicely as a “pullback to the breakout level” trade on the daily time frame.

As we pan down to the 15 minute time frame, we can see that Morgan Stanley broke down from a small bull flag just under its highs around $30.20, and has been consolidating in a narrowing wedge since then. Price action has now contracted considerably and MS now faces a dilemna as the rapidly descending 50 period moving average is now approaching the recent price action. If MS can reclaim this average and break above the descending top of this wedge, It will likely head up for a date with it's previous highs.

If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member.

Posted in Commentary