As anticipated, we had another day of upside follow-through in both the S&P and Nasdaq as both indexes broke through their 50-day moving averages. Although both market indices were in a solid uptrend for most of the day, I noticed some deliberation into the final hour of trading, especially with the Nasdaq. After testing the 20 MA on the 15 minute chart around 2:30 p.m., the market seemed to have lost some of its mojo. Subsequently, both the S&P and Nasdaq nearly broke below the lower channel support of their intraday uptrends. Into the final hour of trading, the S&P futures set a new high, but the Nasdaq futures diverged and set a double top. The Nasdaq acted especially weak into the final 15 minutes of trading, and closed just below its 20 MA on the 15 minute chart. Both the Nasdaq and S&P are now up against the upper channel resistance of the uptrend on the daily chart. Most importantly, volume on the Nasdaq has declined for the past three days, despite the fact there have been four consecutive up days. Remember that volume leads price movement, so declining volume is something we need to pay attention to. All of these factors lead me to believe the markets are due to take a break with some profit taking before going much higher. While I’m not crazy about being short here due to the breakout, I think that longs warrant careful attention.
Software (GSO), Semiconductors (SOX), Telecom (XTC), and Internets (IIX) were all strong yesterday. Biotechs (BTK) were very weak, closing down 2% on the day, despite the strength in the market. Drugs (DRG) and Oil Service (OSX) were also weak.
Today’s watch list:
BBH – Biotechnology Index HOLDR ETF
Trigger = 86.25
Target = 85.25, then 84.35
Stop = 87.15
Notes = The Biotechnology index and BBH showed relative weakness yesterday, going sideways to down as the market was rallying. Although there is a bullish inverse head and shoulders pattern on the daily, it could take several more weeks before it breaks the neckline to the upside. Over the next one to two days, however, it looks more like a short setup. If there is any weakness in the market today, the Biotechs should be one of the weakest sectors.
If BBH gaps down significantly below the trigger on the open, I will probably wait for a break of the 20-minute opening low before shorting. If the gap down is small, I will short half a position and add on a break of the 20-minute low. Once BBH hits my first target of 85.25, I will move my stop down to breakeven.
PPH – Pharmaceutical Index HOLDR ETF
Target = 78.10
Stop = 74.75
Notes = The Pharmaceutical Index (DRG) has been basing at current levels for almost two-weeks and is poised for a breakout. Through this correction by time, the 20 day MA has now crossed over the 40 day MA, indicating a bullish reversal potentially taking place on the daily. Money has flowed into the Nasdaq during the past several days, but yesterday’s relative weakness in the Nasdaq indicates it may be time for some sector rotation back into “old economy” sectors such as the Pharmaceuticals. Since volume has been light in PPH the past few days, we would want to see the volume pick up as PPH triggers because a volume spike would help to confirm the breakout. If the volume does not follow, I may end up tightening my stop immediately after entry.
Deron’s Report Card:
It was quite a profitable day as we closed out both SMH long entries (from Thursday and Monday), as well as the QQQ long. Although SMH and QQQ may have a bit more gas left in them, I did not like the way the Nasdaq acted in the late afternoon session. We took the profits because my suspicion is that we will be able to get a better entry price on a pullback. If you are still long either of these, consider locking in your profit by using a trailing stop just below yesterday’s close.
Although I am not counting it for the report card, I also traded SWH (Software HOLDR ETF) on the long side and made a little more than half a point because I recognized the relative strength in the Software index. This is an example of how more active traders can use ETFs to find additional trading opportunities that may not be listed in the daily report.
The DIA short did not trigger.
QQQ long – bought 24.10 (average), sold 25.43, closed with + 1.33
SMH long (from Thursday) – bought 26.05, sold 28.54, closed with + 2.49
SMH long (from Monday) – bought 28.07, sold 28.56, closed with + 0.49
DIA short (never triggered)
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