The Stock-Compass.com Trading System

Trade Entry

Enter Trades only after seeing clear market strength or weakness and evaluating trading indicators. It is most important to evaluate the overall picture presented by all these factors.

There are many different trade entry techniques. We use just a few:

• “No Supply” for going long or “No Demand” for going short

• The OOPS Trade

• Breaking a trend line

• Breaking support or resistance

“No Supply” and “No Demand”

“No Supply” - is a low-volume down bar ideally with a small range that closes near the middle. It suggests that few are left who wish to sell.

“No Demand” - is a low-volume up bar again ideally with a small range closing near the middle. It suggests that there are few willing to buy.

Both “no supply” and “no demand” are the market's way of inviting you to trade. Here are two ways of initiating this kind of trade:

• If going long, enter this trade only if the high and low of the current bar are higher than the respective high and low of the previous bar, but the close is lower than the previous bar's close. It is just the reverse for going short. Enter the trade just before the bar is finished (so you are sure what the bar's pattern is). Place your protective stop (i.e., protects you if the market turns agains you) just under the low of the previous one or two bars (or just above the high of the previous one or two bars for a short). This technique involves lower risk but a higher possibility of being stopped out (i.e., a losing trade).

• Wait for confirmation of the low-volume bar in the next few bars. In the case of “no supply” go long when the market crosses the high of the “no supply” bar. A protective stop is placed either below the current bar or below the “no supply” bar. For a “no demand” bar, go short when the market moves below the low of the “no demand” bar. The protective stop is placed either over the high of the current bar or over the high of the “no demand” bar.

The OOPS Trade

This type of trade was originated by Larry Williams. The idea here is to take advantage of market fake outs. Before I define it for you here's an example so you'll get the idea:

On the chart below, the U.S. Dollar sank on May 13^th, 2008 between 8:45 AM and 12PM. For the rest of the day it went up. Early the next morning at 4:45 AM the dollar shot up – making people think that the market was continuing it's bullish trend from the previous day.

Professional syndicates have enough money in reserve to be able to push the market up in the early morning hours. As soon as people climbed on board long these same professionals started selling – big time! If you had placed your trade to go short under this turnaround bar you would have made $335 per contract by 9:45 AM on the 15^th.

The objective of an OOPS trade is to recognize big up or down thrusts that are probably too good to be true and place a trade to catch the turnaround – if it happens. This trade works by first having the crowd flow one way and then – OOPS – realize they're terribly wrong and head for the exits. Here's another example

On November 30^th, (third vertical line from the left) AMAT gapped up at the open. Early in the trading session, many were convinced that it was a bullish move. But at the time there was weakness in the background via two professional distribution days and AMAT had been in a bearish trend since August. Initiating a short under the previous day's high would have netted better than a 10% gain over the next few weeks.

Breaking a trend line

Bullish trend lines are drawn connecting the bottoms; bearish trend lines connect the highs. Trend lines, once established, resist price moving past them. The longer a trend line has been in effect the stronger this resistance is. Once a trend line is broken, (i.e., price moves past it) that same trend line now resists movement in the opposite direction. Trend lines resist price movement in both directions.

Very steep trend lines are much less likely to last as long as those that rise or drop more gradually. But trading broken trend lines are no more perfect than any other part of trading. Professionals frequently “break” trend lines only to immediately reverse them back. The overall complexity of factors that push prices one way or another makes it very important to consider a market's current strength or weakness.

Before we get to the broken trend line example, here's the COT chart of Coffee again showing the commercials very very short in mid February 2008:

Look how powerful trading with broken trend lines can be:

In the trade example above the setup was good:

• The commercials in the COT report were more short in mid February than they had been in the previous three years.

• There had been three professional distribution days in the immediate background

• The angle of the bullish trend line was very steep

• Bullish sentiment was much too high at 95%.

Breaking support or resistance

“ Support”is a narrow range of price below the market where price bounces off but doesn't – or just rarely – penetrate. “Resistance is the same thing at the tops of price. Our first example shows support ranging from September 7, 2007 through January 4, 2008 when it was finally broken:

Price touched the line twice at (1), twice at (2) before breaking through at (3). This same line turned into resistance at (4) but the ND broke through 1 ½ weeks later. If price stays above the line could very well act as support again.

If a short had been initiated at (3) when the support was broken a profit of more than 10% would have been obtained by March.

Here's an example of the same time period in the S&P 500:

Between November 27^th and early January the support line held. On January 15^th the S&P broke support and this same line turned into resistance. It held firm on May 5^th and 16^th.The red accumulation line presents bearish divergence as it is lower than it was in mid February while price is higher than it was in mid February. But the seasonal chart is bullish. The volume on Friday May 16^th, 2008 was slightly lower than Thursday's. This suggests there isn't strength to blast through the line for the time being. Time will tell.