Wow! That was some rally yesterday! All of the major market indices formed bullish engulfing candlesticks on the daily charts by trading below Tuesday’s lows and rallying to close above Tuesday’s highs. The rally was so strong that if you were not long by about 1:30 pm EST, there was never a “safe” point of entry because of the lack of any significant retracement levels. It doesn’t really matter why the markets rallied so much yesterday, but a big factor was probably the fact that no major bombs were dropped on the final day CEOs were forced to verify their financial statements. That seemed to remove one element of fear, at least in the short term.
One of the most bullish things we saw in the S&P was the break of the double top and consolidation highs we have been watching for the past several weeks. The S&P futures is now above its 40 day MA for the first time since March 2002. I always talk about the importance of volume in determining the momentum behind a rally, and the volume yesterday was actually pretty decent on both the Nasdaq and S&P. Since the markets rallied to close above the consolidation highs of the past week, those levels that were formerly resistance should now act as support levels. That correlates to 962 on the Nasdaq futures and 914 on the S&P futures. Yesterday’s bullish action should see some follow-through over the next week or so, primarily because the upper channel of the 5-month downtrend was broken. Although I anticipate higher price action, we need to be careful going long right out of the gates because the markets had such big gains yesterday without seeing any significant retracements going into the close. As such, I would not be surprised to see a pullback to the support levels mentioned above before going much higher. That being said, I think this is one of the best technical buy setups I have seen in the broad market in about 6 months (assuming current breakout levels hold).
On a final note, don’t feel bad if you missed yesterday’s rally. Chasing a parabolic rally and buying too late without any pullback is usually not a good risk. Although it would have worked yesterday, we always need to put the odds in our favor over the long term by doing good risk/reward plays. More important than making profits, your number one priority should always be capital preservation. Remember that without capital, there are no profits to make! Whether you caught Wednesday’s rally or not, don’t forget that each new trading day is filled with new opportunities. Your goal is to stay in the business over the long-term, not swing for the high-risk homeruns. Just a friendly reminder from your fearless leader (smile).
Today’s watch list:
QQQ – Nasdaq 100 Index ETF
24.25 OR pullback to 23.75 (half position; see notes below)
Target = 26.40
Stop = 23.25
Notes = I will be looking to enter either on a break ABOVE 24.25 OR on a pullback to the 23.75 area, which is now a big support level. Remember that standard rules apply in the event the QQQ gaps up. That means I will be looking for confirmation of the gap-up by waiting for a break of the 30-minute high before buying the Qs. However, if there is a gap down or selloff down to the 23.75 area, I will take a half position there and add to it upon the break of 24.25. The Nasdaq acted very well yesterday, and had more relative strength than the S&P the entire day. After closing above its resistance of 24.80, its next major resistance is the 40 day MA around 24.20. However, if it breaks that, I expect a test of the July 17 highs just over 26.40.
SMH – Semiconductor HOLDR ETF
Trigger = 26.10
Stop = 24.75
Notes = Even though the SOX index has been a laggard during the past few weeks, it could see a significant run if it breaks the consolidation levels at 25.80, which would invoke short covering due to a break of the 20 day MA, which also correlates with the upper channel of the downtrend from May 17. Standard rules apply if SMH gaps up. I will be looking for confirmation of the gap-up by waiting for a break of the 30-minute high before buying SMH.
Deron’s Report Card:
I covered the SPY short from Tuesday and took profits when it hit my lowered stop on the open.
I bought and got stopped out of the OIH long in the morning. However, when it recovered in the afternoon beyond my initial trigger price, I re-entered the position, which is now in the money. My second entry in a position that I initially got stopped out of is often the most profitable due to better entry prices and more momentum the second time around. It is important not to have the mentality of, “Well, I lost money the first time, so I don’t want to get back in.” Leave the emotion out of it. While I never blindly re-enter a trade out of revenge, I will always get back in if I still like the setup.
I shorted MDY when it triggered and it initially worked out pretty well. However, the broad strength of the market pushed just about everything higher in the afternoon, so we had no chance of the short working out at that point. I got stopped out in the afternoon, but was really glad I used my stop considering that it closed a full two points higher than where my stop was. That’s why you need to always obey your stops!
- SPY short – shorted 89.73, covered 89.12 (hit lowered stop of 89.05), closed with + 0.61
MDY short – shorted 77.91, covered at 78.85 (hit stop of 78.80), closed with (0.94)
OIH long – bought 53.40, sold at 52.25 (hit stop of 52.30), closed with (1.15)
- OIH long – bought 53.34 (re-entry in afternoon), raised stop to 54.10, will sell into any opening gap, open with + 0.95
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
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
Unless otherwise noted, average holding time is 2 days to 2
weeks once a position is triggered. Updates on open positions are provided
Yours in success,
Deron M. Wagner