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Jigsaw Puzzle


The most amount of money is made in the quickest amount of time at the end of market moves - both up and down, in blow-offs and waterfalls alike.


Me, I'm waiting so patiently
Lying on the floor
I'm just trying to do this jigsaw puzzle
Before it rains anymore

-Rolling Stones

The fastest moves occur at the end move. The most amount of money is made in the quickest amount of time at the end of market moves – both up and down, in blow-offs and waterfalls alike.

With that in mind I thought it would be a good idea to look at some of the principles and patterns I use in identifying set-ups. Why? Because sometime this summer my trading service will be launched again by Minyanville. So, this is a good time to take a look at some of the situations I have been focusing on in the Buzz and Banter. As you will see, all of my set-ups are defined by price patterns. Price being the point of the trading sword.

On May 30th in the Buzz, I mentioned that Google (GOOG) was poised to breakout as the stock was in a series of lows in the 490's. My reason:

  • GOOG tested its 200-day moving average in March twice, and has been making higher highs and lower lows since then.

  • In May GOOG tested its 50-day moving average; on May 16th GOOG left a multiple buy signal - an Expansion Pivot, a 180 buy signal as the stock scored a reversal back above its 50-day moving average on the largest range of the prior ten days.

  • Then on May 30th a continuation breakout signal occurred as GOOG traced out another set of multiple signals – an Expansion Breakout, LROD (large range outside day), Rule of Four buy-out signal. An Expansion Breakout is a breakout to a new 60-day high on the largest range in ten days. An LROD is a large-range outside day. A Rule of Four Breakout is a breakout over a declining, or flat, three-point trend line.

Since then, GOOG has been showing strong, relative intra-day strength versus the broad market. GOOG closed at 518.88, a new all time high yesterday, which is important as the stock also closed substantially above a "square" of resistance of 509/510. The next levels to watch are 528/529, then 553/556.

The reason the Rule of Four pattern works so well is because often times the market plays out in threes – the fourth time through a level typically means a new leg – up or down. According to the Principle of Threes, many times the market plays out in threes. For example let's take a look at a monthly chart of the S&P. As you can see there were three drives to a high into the March 2000 peak. There were also three drives to a low into the July 2002 capitulation bottom. The March 2003 pivot occurred on a test of a test of that July 20002 low. It was the third in a season of lows from where the market began a lift-off.

Since then, I see three distinct bull phases. The first lasted into March 2004, the second lasted into May 2006, and the current or third leg began in July 2006.

Let's take a look at another monthly chart, the chart of Amazon (AMZN). Look how AMZN exploded when an angular monthly Rule of Four breakout was triggered.

The rule is to review the weekly and monthly charts, even if you are trading off the daily and hourly charts.

Looking at a daily chart of AMZN, there was a Rule of Four breakout on April 16th, which led to an explosion on April 25th. Note the LROD on May 16th, which preceded another explosion. Note the LROD on Monday that preceded Tuesday's explosion.

A daily chart of Guess? (GES) shows an angular Rule of Four breakout on May 30/31st. Note the Reversal New High Method signal on Tuesday prior to earnings after the close. GES traded up over three points after the earnings. It pays to follow the tracks of the big money, doesn't it?

On Thursday, Mastercard (MA) triggered a late day angular Rule of Four breakout on its ten minute chart. The stock rallied a point in an hour. It is important to understand the same patterns exist on all time frames.

A chart of Marathon Oil (MRO) shows a Rule of Four Breakout on May 4th and a Reversal New High signal on May 29th. From this year's low at 83/84, MRO appears to have blown-off 360 degrees on the Square of Nine Calculator. Measuring up from last year's summer low, at 69, MRO is up a critical 540 degrees in one year. This is a major square out in time and price. I'm going to talk more about these 540-degree moves as it relates to the stock market in an upcoming column.

Finally, last week, I mentioned Cleveland-Cliffs (CLF) on the Buzz as a trading short. Why? On Friday CLF left a Gilligan sell set-up. This occurred on the third day up of a bottle rocket run.

As for the market, Tuesday was an important day. For two reasons: The poster children of the bull run, Apple (APPL) and Crocs (CROX), both scored new all time highs. I overheard Hoofy's explanation as to why these two stocks defied Tuesday's market sell-off. According to Hoofy, CROX is going to announce a version of the iPhone built into a new model of one its shoes. Apparently the shoe is to be called the Maxwell Smart phone. Hey, that's as good as any explanation Boo has heard.

Oh yeah, and Goldman Sachs ate some humble pie and crow on Tuesday, regarding its prediction about rates being cut 75 basis points before the end of the year.

The bulls may be losing a grip on their narrative based on rate cuts, in much the same way as the Fed has lost a handle on the money supply.

Momentum may be showing some divergences and some strains, but momentum is a Medusa – a head with many moving snakes. The bulls will spin this Medusa of a market any way they can to avoid getting bitten. Already there seems to be almost unanimity of opinion that a ten-year yield north of five percent is a non-event. I hope they are not calling in their trades on those new CROX Maxwell Smart-I phones.

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Positions in MRO, MA, AAPL

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