Commentary:
Yesterday was a great example of why the 20-minute opening gap rule is so important. If you would have bought QQQ or SPY on the opening gapup, you probably would have stopped yourself out an hour later. Instead, by obeying the gap rule, we avoided entering the trades and getting sucked in at the high of the day. Sometimes, when the gap up holds, you will miss a bit of profit by waiting 20 minutes before entering a gap up. However, our goal is to be in this game over the long term, which mandates making capital preservation your number one priority! Statistically, gaps fail more than they hold and all we can do is play those odds. Remember that missed money is better than lost money, although in the case of yesterday, we neither missed money nor lost it.
I am presently working on a set of trading rules that will be posted on the web site. These rules will include the opening gap rule, as well as rules on when a breakout or breakdown is actually confirmed after triggering. In the meantime, until the rules are completed, I will continue to remind you each day of anything you need to be aware of for a particular play.
Today’s watch list:
BBH – Biotechnology Index HOLDR ETF
Sector: Biotechnology
Short
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
Sector: Pharmaceutical
Long
Trigger =
75.85
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 another SOH (sit on hands) day due to the sideways range of the market. Neither the QQQ or SPY longs triggered due to the 20-minute opening gap rule. The high of the day in both of these was seen during the first 10 minutes of trading and they both sold off after that, never looking back. It was a great day to do nothing and protect capital in anticipation of the next SOLID trading opportunity.
Closed Positions:
-
QQQ long – (did not trigger)
SPY long – (did not trigger)
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