Monday’s market action was just plain ugly and every sector I follow closed in the red. The S&P has now retraced nearly two-thirds of the way back to the former low of 775, which decreases the odds of testing last week’s highs and increases the possibility of testing the prior low. In fact, the Nasdaq 100 Index actually did close at a new 5-year low on Monday. However, I would not be surprised to see a day or two of strong rallying this week because it is unusual to have such a big move off the lows and come all the way back down without at least attempting to retest the highs. The main problem with a rally though is the amount of overhead resistance that now exists because of the severity of the retracement, especially in the Nasdaq which already took out the prior lows.
The Semiconductor (SOX) index continued its obliteration on Monday, dropping another 5.81%! If you are still short any of the Semiconductor stocks I mentioned last Friday, you are probably smiling! Just about every stock in that sector set a new 52-week low on Monday. Although there are not yet any technical signs of a reversal, I would be careful getting into new SOX short positions here because the sector seems oversold relative to the rest of the market and due for a bounce. In fact, there may even be some good long plays in this sector today if the broad market can manage a rally. I’m also watching for a bounce in the Biotech, Software, and Retail sectors today. On the short side, keep an eye on the Cyclical stocks such as HDI, GT, BDK, and SWK, all of which are poised to break support here.
As I see it, the main problem right now is not heavy selling volume, but rather a lack of buying interest in the markets. This has caused the markets to be choppy and non-committal intraday, even though it has drifted lower during the past several days. Investors are looking for a reason to buy, a ray of hope, but are having difficulty finding one. Cisco (CSCO) reports earnings after the close today, so that is one of the few events that has the potential to give the markets a bounce from current levels. We’ll be ready either way!
Today’s watch list:
MO – Philip Morris Companies, Inc.
Trigger = 47.75 (half-position), add to position at 48.20
Target = 50.10
Stop = 46.80
Notes = MO had great relative strength on Monday afternoon due in part to good news in the tobacco sector regarding the ongoing lawsuits. Although I never trade a stock based solely on news, I like when the stock is already a good technical setup in the first place and the news only serves to make the technical setup stronger. MO closed just above resistance of the high of July 8 and its 40 day MA on strong volume. A small move higher confirms the break of resistance on the daily with not much resistance overhead until its 200 day MA at $50.15. You may also want to watch RJR for entry on the long side for the same reasons. Both charts look the same.
DOX – Amdocs Limited
Trigger = 8.10
Target = 8.90
Stop = 7.80
Notes = DOX is one of the few software stocks that has been showing relative strength during the broad market selloff. DOX is now above its 20 day MA on the daily chart and is forming a bullish ascending triangle on the 60-minute chart (pictured above) which should resolve higher to test recent highs just below $9.
IBM – International Business Machines
Trigger = 65.50
Target = 60.35
Notes = Although I am not certain if this stock will trigger, I definitely want to be short if it does because it will have broken to a new 4-year low. It’s been consolidating at the lows on the daily chart and is below all its major moving averages. IBM is now testing support of the 66 area for the fourth time in two months. Which each subsequent test, the odds of it breaking support increase. Like all my plays, I definitely will NOT enter this trade unless the exact trigger is hit. Also, if it gaps down on the open, I will wait until the 9:50 reversal period before making a decision to short it because I don’t want to get trapped in a false breakdown and rally.
Deron’s Report Card:
The BAX short triggered today, collapsed, and came within a dime of hitting my target, so I took profits by closing the position.
Although the ADPT short rallied right to my lowered stop loss, I made a judgment call to give it a few more cents to rally up to my breakeven short entry of 5.75, but it never went more than a penny above my stop, so I stayed short and tightened my stop.
Neither the GTW or CMVT longs triggered. I am also removing GTW from the long watchlist today because it violated the short-term uptrend.
- BAX short – shorted 37.53 (average), covered 35.80, closed with + 1.65
GTW long (never triggered)
CMVT long (never triggered)
- ADPT short – shorted 5.75, lowered stop to 5.46, target still 5.00, open with + 0.46
Glossary and Notes:
Remember that opening gaps that cause stocks to trigger
immediately on the open carry a higher degree of risk because the gaps (both up and down) often do
not hold. Use caution if trading stocks with large opening gaps.
Trigger = Exact price that stock must trade
through before I will enter the trade. If a long position, I will only enter the
stock if it trades at the trigger price or higher. For a short position, I will
only enter the stock if it trades at the trigger price or lower. It is really
important to only enter the position if the trigger price is hit, otherwise the
trade becomes riskier.
Target = The anticipated price I am
expecting the stock to go to. However, this does not mean that I will
always hold the stock to that price. If conditions warrant, I will sometimes
take profits before that price, in which case I will notify you of the
Stop = The price at which I will have a physical stop
market order set. As a position becomes profitable, this stop price will often
be adjusted to lock in profits. Again, you will always be notified of such
changes in the next daily report or intraday if you subscribe to intraday updates.
Closed P&L under Deron’s Report Card is based on the actual price I closed my trade at, not just the theoretical target or stop price listed for each stock. Open P&L is based on the closing prices of the most
recent trading day.
otherwise noted, average holding time is 2 days to 2 weeks once a position is
triggered. Updates on open positions are provided daily.
Yours in success,
Deron M. Wagner