Commentary:
The S&P and Nasdaq acted in a predictable fashion today, consolidating in the upper range of yesterday’s rally. Remember that large percentage price moves like we saw on Wednesday usually correct either by price or time. A correction by price occurs when there is a retracement (pullback) off the highs before subsequently setting new highs. A correction by time occurs when there is no significant pullback, but prices go sideways for a while, absorbing the gains as the supply/demand equalizes. Yesterday was simply a day of correction by time (also known as consolidation), which is actually a healthy and bullish action that increases the likelihood of more follow-through. I have found that consolidation days are usually difficult to actively trade because of the tight trading ranges and sometimes whippy action. However, they are great days to build positions that you want to take over the next several days by taking advantage of pullbacks to add to your long positions.
Although both the S&P and Nasdaq held up pretty well yesterday, there was definitely more relative strength in the Nasdaq than the S&P. This is evidenced by the fact that the Nasdaq closed at its high of the day, but the S&P closed just over the middle of the day’s range. The Nasdaq’s rally into the close gave us a profit buffer on our QQQ long position that we entered yesterday as we continue to see rotation back into the tech stocks. As long as we hold above yesterday’s range, the Nasdaq (and QQQ) is perfectly poised to see a nice rally on the daily chart.
The highest percentage gainer yesterday out of all the sectors I follow was the Oil Service sector (OSX), which worked out great considering we were long the Oil Service tracking stock (OIH) since Wednesday. Through the use of trailing stops, we were able to lock in a profit of over 4 points when we closed out the position yesterday. Even nicer was the fact that we did not have to worry about being in the “wrong” stocks within the sector because we bought a diversified basket of oil stocks through OIH. This is just one of the many benefits of trading ETFs (as discussed in my weekly report).
Today’s watch list:
BBH – Biotech Index HOLDR ETF
Sector: Biotechnology
Long
Trigger = 89.65, then 90.60 (see IMPORTANT notes below)
Target = 98.85
Stop = 86.45
Notes =
The Biotech index (BTK) has been in a solid uptrend since July 11 and is positioned to make another leg up after several days of consolidation at the highs. More importantly, it has formed a perfect bullish inverse head and shoulders on the daily chart. Remember that the predicted move on any head and shoulders pattern is the same as the distance from the top of the head to the neckline. In this case, that is a predicted move of roughly 20 points, right up to the 200 day MA. However, it would probably take several weeks or even months to make that much of a move. My plan is just to catch a nice piece of that move.
Be aware that although BBH is rather liquid, it can be quite volatile at times, so I recommend reducing your share size when trading this ETF. Since there is an 8-point profit target, even 100 shares can be quite profitable if the trade works out. However, because there is also more than a 3-point stop loss, too large of a position would really hurt if the trade does not work. Remember that capital preservation is the key! Anyway, I will buy a HALF position on the first trigger of 89.65 and will add another half position if it confirms a break of yesterday’s high of 90.40.
PPH – Pharmaceutical Holdr Index ETF
Sector: Pharmaceutical
Long
Trigger =
75.55
Target = 79.12
Stop = 73.90
Notes = Similar setup to the BBH long setup above except that there is no inverse head and shoulders. I also like the increasing volume on the daily chart with spiking OBV (on-balance volume). I recommend watching to see if there is any divergence between the Nasdaq and S&P today. If the Nasdaq continues to show relative strength, I will be more wary of this trade due to sector rotation.
Deron’s Report Card:
As mentioned in the initial commentary, I used a trailing stop on the OIH long which began by setting a stop just below the opening price of 54.50. Because it rallied immediately and never traded below that price, I kept raising my stop behind it, usually keeping it about 1 point below the current price. This enabled me to capture most of the gains yesterday without risk of giving all the profits back. Even though OIH never really hit my trailing stop, I closed the position yesterday to focus more on the long side of the Nasdaq. Trailing stops are a great strategy you can use on ETFs to protect profits, but also allow your profits to grow. I will be teaching a lesson on trailing stops in the near future.
On the QQQ position, I entered with the exact strategy I mentioned in yesterday morning’s report. I bought on a break of the 30-minute opening high of 24.42, which occurred around 10:15 am when the QQQ broke back above this level. I also bought another half position on the pullback to 23.75 that occurred just after 1:00 pm. This gave me an average price of 24.10 on my QQQ long position, which I took overnight with a tightened stop.
Just like the QQQ, I bought SMH on a break of the 30-minute opening high of 26.10 (ignoring the early ECN prints at 26.90). This break back up above the opening high also occurred around 10:15 am, just like with QQQ. Waiting for a break of the 30-minute opening high is a good way to get confirmation that any morning rally has legs to it. Even though you pay a higher price, it is a safer entry in the long run.
Closed Positions:
- OIH long – bought 53.34, sold 57.55, closed with + 4.21
Open Positions:
- QQQ long – bought 24.10 (average), stop raised to 23.55, open with + 0.43
SMH long – bought 26.05, stop raised to 25.15, open with + 0.00
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