Commentary:
As anticipated, both the S&P and Nasdaq showed weakness and were not able to break Monday’s highs. However, because Monday was a breakout day, there was support directly underneath from the highs of August 15 and 16. Therefore, the market became stuck in a trading range, bouncing between support and resistance. Yesterday was a great day to trade absolutely nothing!
Going into today, I think we could see another range-bound day, much like yesterday. Most of the daily charts I came across in my research are stuck between support and resistance (“no-man’s land”). On the Nasdaq futures, I see the 1020 level as being an important resistance point (945.50 on the S&P futures). If the Naz or S&P can break those levels, they will probably test Monday’s high of 1030 (952.30 on the S&P), which would enable the possibility of another breakout day. On the downside, watch for a break of yesterday’s low, which is 1003 on the Nasdaq and 931.50 on the S&P.
I would not be doing my job if I did not occasionally remind you of the importance of knowing when NOT to actively trade. Although having a position in multiple-day “swing” trades is okay on choppy days like yesterday, traders who attempt to engage in intraday trading typically lose money by getting stopped out on both the long AND short side of the market. In fact, the only person who gets rich trading on days like yesterday is your broker! So, the best strategy is to simply stay out of the market when it is range bound.
Unlike institutional traders, the single biggest advantage you have as a private equities trader is the ability to stay out of the market when you desire. However, most traders never take advantage of that! I have learned from experience that overtrading on days when you have no right being in the market in the first place usually results in giving back your hard-earned profits from the smooth, trending days. If you can learn to minimize your trading on choppy days and be aggressive on trending days, imagine how much better your profitability would be! Don’t feel like you need to be in the market every minute of every day!
I personally made exactly one trade yesterday, which was a day trade on DIA short the first time it broke 89. However, the choppiness caused me to get stopped when it rallied to 89.50, only to watch it subsequently fall down to 88.25. After I saw that action, I made up my mind I was done trading for the day. Instead, I researched and studied charts for the remainder of the day. This enabled me to stay productive without risk of capital. Anyway, I know I was a bit long-winded here, but it is really important to have the discipline of identifying when NOT to trade and then actually stick to your plan.
Today’s watch list:
QQQ – Nasdaq 100 Index Tracking Stock
Sector:
n/a
Long
Trigger = 25.40
Target = 26.40
Stop = 24.90
Notes = A break above yesterday’s resistance level of 25.25 will probably result in a test of Monday’s high of 25.59. Beyond that, the next resistance is not until around 26.40. In addition to the daily chart, I really like the weekly chart, which is poised the upper channel of a 6-month downtrend. Essentially, if Monday’s high gets broken, that is a bullish signal in the short-term.
Remember that standard gap rules apply! If QQQ gaps above our trigger price, we will wait for a break of the 20-minute opening high before entering. Since a majority of opening gaps fail, this rule keeps us out of trouble.
SPY – S&P 500 Index Tracking Stock
Sector:
n/a
Long
Trigger = 95.07
Target = 96.10
Stop =
94.40
Notes = I like this trade for the same reasons as the QQQ trade above. However, SPY has more room to run until it hits the upper channel resistance on the weekly chart. Although we don’t know for sure until the market opens, the Nasdaq (QQQ) will probably be stronger than the S&P (based on the past several days performance). But, I list this trade in case the relative strength shifts back into the S&P.
Standard gap up rules apply!
Deron’s Report Card:
Whether or not BBH actually triggered is a matter of splitting hairs. According to my commentary yesterday, I was only going to short BBH on a gap down if it subsequently traded below its 20 minute opening low, which was 85.81. After the gap down, BBH immediately showed relative strength, rallying against a declining market. As such, I stopped watching it, but set my alarm to warn me if BBH dropped more than 5 cents below its opening low of 85.81 (I always set alarms at least 5 cents below support prices to avoid getting sucked in when the specialist is just running stops). At just after 10:00 a.m., BBH dropped to 85.80, which broke the opening low by one cent, but my alarm never went off because it was set for 85.76. So, technically BBH did trigger by trading one cent below the 20-minute opening low, but I never entered the trade because my trading rules do not constitute one cent as being a break of support or resistance. If you took the trade on the break of 85.81 and got stopped out, don’t worry about it. There are just as many times when you take a trade that you technically should not have and it accidentally ends up being profitable.
Closed
Positions:
- PPH long (did not trigger)
BBH short (did not enter per notes above)
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