Commentary:

Friday’s market action continued to confirm the breakout from August 14 by consolidating (correcting by time) near the previous day’s highs. Remember that the longer price corrects by time, the more powerful and reliable the subsequent rally. Both the S&P and Nasdaq gapped down on Friday morning, but buyers stepped in, quickly bringing prices back into Thursday’s trading range. This is typical in small gaps in the opposite direction of the short term trend, which is up.

I have noticed a definite change in sentiment to the bullish side during the past week and it is something we do not want to ignore. The biggest factor that indicates the change to bullish sentiment is that we have seen a lot of buying on weakness (including gap downs) versus the selling into strength that was prevalent a few weeks ago. Once again we saw bullish divergence between the Nasdaq and S&P on Friday. The divergence was easily recognizable because the Nasdaq futures took out Thursday’s high within the first 90 minutes of trading, maintaining its strength in the afternoon, and closing above Thursday’s high. The S&P futures, on the other hand, managed to rally only one point above the previous day’s high when it rallied to 936 intraday, but quickly came back into and closed in the middle of Thursday’s range. The strongest sector on Friday was the SOX (Semiconductors), which closed up 6.42%. As such, we now have a nice open profit on the SMH long from Thursday, as well as with the QQQ long. The weakest sectors were mostly “old economy” sectors such as Oil and Oil Service, Utilities, and Pharmaceuticals. The Biotechs were also weak, which is why neither PPH nor BBH triggered from Friday’s daily report. The weakness in the traditional defensive sectors confirms the rotation back into the tech stocks. However, I will still be keeping a bullish eye on the Biotechs because of the inverse head and shoulders pattern we discussed on Friday. Watch for a break of 90.40 on BBH. If the neckline is broken, the predicted upside move is rather large.

Keep in mind that last Friday was option expiration day, which often causes countertrend moves during the final hour of trading, as we saw into Friday’s close. That is why the Nasdaq’s seemingly strong rally going into 3:00 p.m. was quickly slammed back down. My expectation is that both the S&P and Nasdaq will test Friday’s high sometime today. If either of them break the highs, we could once again see a solid uptrending day. Remember that we don’t typically get involved in trying to figure out what is causing a rally or how long it will last. Rather, we just look at the technicals and follow the trend. If the short-term trend is up, most of the plays in the daily report will be long. If it changes, we will be ready for that too!

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Today’s watch list:

SMH – Semiconductor HOLDR ETF
Sector: Semiconductor
Long

Trigger = 28.05
Target = 30.10
Stop = 26.88

Notes = Although we are already long SMH from Thursday, I will be ADDING to the position if it breaks above Friday’s high of 27.85 and trades through 28. The target is the upper channel resistance of the uptrend that started on August 5.

The price target on the initial entry of SMH (from 26.05) is still 28.15, and I will be taking profits on the original position if it hits my target. This new entry in the SMH has a higher target and a tighter stop, and will be treated as a separate trade.

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DIA – Diamonds (Dow Jones Industrial Average tracking stock)
Sector: n/a
Short

Trigger =
87.30
Target = 85.85
Stop = 88.10

Notes =Although I am not bearish right now, the Dow has been showing relative weakness to both the Nasdaq AND the S&P by not even being able to break above Thursday’s high intraday on Friday. There is a good chance this short will not even trigger, but if the market unexpectedly shows weakness today, this is one of the first ETFs I would look at shorting. It would also make a nice hedge against some of our long Nasdaq positions. If it triggers, expect it to find support at the upper channel of its downtrend on the daily, which is just under 86.

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Deron’s Report Card:

Due to the sector rotation I discussed in today’s commentary, neither the PPH nor BBH longs triggered. Instead, money continued flowing into the Semis, enabling us to gain a solid open profit on the SMH and QQQ longs from Thursday. As noted below, I have raised the stops on both of these as we continue to let the profits ride.

Closed Positions:

PPH long (never triggered)

BBH long (never triggered, but watching for entry above 90.40)

Open Positions:

SMH long – bought 26.05, stop raised to 26.87, open with + 1.31

QQQ long – bought 24.10 (average), stop raised to 24.48, open with + 0.60

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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.

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Yours in success,

Deron M. Wagner