Commentary:
Speculation on positive Cisco earnings combined with a strengthened dollar overseas combined to cause a solid rally in all the major market indices yesterday. Strength was more prevalent in the Nasdaq than the S&P, which confirms the rally was, at least in part, caused by Cisco. More importantly, the volume yesterday was much stronger than the selloff volume we saw in prior days. This often indicates the sellers are drying up.
Sector rotation occurred yesterday as money suddenly shifted out of the old economy sectors such as Healthcare, Consumer Goods, and Pharmaceuticals and back into the Nasdaq, despite the new 5-year lows set on Monday. Within the Nasdaq, the Semiconductor index (SOX) had a strong rally off oversold conditions, rallying 6.2%. The Networking Index (NWX), Software index (GSO), Biotech (BTK), and Computer Hardware index (HWI) all showed strength as well. The weakest sectors were Telecoms (XTC), Pharmaceuticals (DRG), Consumer Goods (CMR), Healthcare (HCX), and Insurance (DJUSIR).
Since the S&P and Nasdaq both sold off pretty hard into the close, it created a lot of bearish “inverted hammer” candlestick formations on the daily charts. This will cause additional overhead supply going into today that will make a follow-through rally to break Tuesday’s highs a bit more difficult. However, the market seemed to like Cisco’s earnings because most stocks were up after hours yesterday, which should aid in creating follow-through to the upside today.
Today’s watch list:
BBH – Biotech Holders Trust
Sector: Biotechnology
Long
Trigger = 82.20
Target = 85.40
Stop = 80.70
Notes = This is the tracking stock for the Biotech (BTK) sector, which has showed a lot of relative strength to the Nasdaq during the past week. The index has maintained the uptrend that began two weeks ago and is still above its 20 and 40 day moving averages. With sector rotation back into the Nasdaq, that should enable BBH to test its swing highs just over $85 within the next few days. If BBH gaps up above the trigger on the open, I will buy once it confirms the gap by waiting for a break of the 20-minute high. Be aware that this stock is quite volatile, so use limit orders and reduce your position size accordingly. Remember to use the Position Size Calculator to manage risk.
SMH – Semiconductor Holders Trust
Sector: Semiconductor
Long
Trigger =
24.80
Target = 27.05
Stop = 23.60
Notes = This is the tracking stock for the Semiconductor (SOX) sector, which had a sudden surge of panic buying yesterday. Because the SOX index broke to new 52-week lows a few days ago, shorts are now trapped short in the semis since they have began showing relative strength and good volume yesterday. Also notice how light the selling volume was on Monday. I would expect at least a few days of follow-through and a test of the 20 day MA, aided by positive perception of CSCO earnings last night after the close. Tracking stocks are a great way to trade in a particular sector with less overall risk than trading an individual stock because each tracking stock is actually quite diversified within the sector.
VZ – Verizon Communications
Sector: Telecom Service
Short
Trigger = 29.45
Target = 27.90
Stop =
30.35
Notes = The telecom sector was very weak yesterday, despite the strength in the market. If we are going to be short, it is always best to be short a stock in a weak sector because it improves the risk/reward ratio. VZ is below all of its major moving averages on all the charts I follow, which means the trend is still down. Notice how it rallied up to its 20 day MA a few days ago and was unable to go any higher. If VZ trades down “into the gap,” I expect the follow-through selling momentum to take it down to the 28 area. This play is similar to the BAX short from a few days ago.
Deron’s Report Card:
Because the sector rotation back into the tech stocks occurred so suddenly yesterday, MO did not have a lot of strength left after the initial gap up this morning. After MO gapped up, I waited for a pullback into the 9:50 am reversal period and bought it. However, I noticed that MO had relative weakness because it failed to set new highs when the S&P did, so I decided to bail on it and sold for a small profit.
DOX long was a dog with fleas! I bought when it triggered at 8.10, but dumped it because it was showing too much relative weakness into the afternoon session. If the markets are at the high of the day at the same time the stock is at the low of the day, that is not a position that I want to stay long. Closed it with a small loss.
IBM short never triggered (obviously)
I closed the ADPT short from a few days ago with a small profit
Closed Positions:
- MO long – bought 48.41, sold 48.75, closed with + 0.34
ADPT short – shorted 5.75, covered 5.43, out with + 0.32
DOX long – bought 8.10, sold 8.00, closed with (0.10)
IBM short (never triggered)
Open Positions:
- (none)
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
change.
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.
Unless 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