Commentary:
Monday morning’s gap up in the S&P and Nasdaq faded shortly after the market opened, into the 10:00 AM reversal period. This enabled yesterday’s short fade plays on DIA and PPH to work out great, as well as our shorts from over the weekend. Yesterday morning was a great example of how you can trade contrary to the market direction and have the odds significantly in your favor. By selling short the rally into resistance, we minimized our risk and maximized profits with the morning fade plays.
Although the opening fade does not work all the time, there are specific days when the odds of it working are pretty good. Because the market closed so weak on Friday after only one day of selling, it was likely there would be follow-through at least into the next morning, which is exactly what happened. Going into the afternoon, the markets found support from the pre-breakout consolidation levels of last week. That is why I sent an intraday e-mail to you suggesting tight trailing stops to protect your profits in the event of an afternoon reversal.
Going into today, I’m not thrilled about the prospects for trading on either the long or short side of the market. Yesterday afternoon’s rally put both the S&P and Nasdaq in “no-man’s land.” There is solid support directly underneath current price levels, but also a few days of price resistance overhead. In fact, just about every chart I am studying on a 60 minute time frame has a pattern that looks something like this:
Although you could say there is a bearish head and shoulders pattern setting up on the above chart, I’m not inclined to be very bearish yet because there is a good deal of price and moving average support in this area AND the recent market sentiment is still on the bullish side. See why I said most sectors are in “no-man’s land?” I don’t have a solid feel for where the market is headed right now, but today’s action could tell us a lot.
When I see chart patterns like the above, the next trading day is typically whippy, especially combined with the fact that we are in a pre-holiday trading week. The lighter that volume is today, the choppier I expect trading to be. Today will probably be a SOH (sit-on-hands) day, meaning the most profitable thing you can do is absolutely nothing. Nevertheless, I did find two sector plays that look OKAY, but neither of them make me very excited. Just to reiterate, I recommend reducing your share size on all trades until after the holiday.
Today’s watch list:
SMH – Semiconductor Index HOLDR ETF
Sector: Semiconductor
Long
Trigger = 27.25
Target = 28.00
Stop = 26.80
Notes = Market sector rotation typically flows in cycles of three days, which means we will probably see some rotation (although maybe minor) back into the Semis today or tomorrow. If the Semiconductor Index (SOX) can get above yesterday’s high, it should rally up to around the 350 area (28 on SMH), which is last week’s consolidation (resistance). If this play triggers, it is doubtful that we will stay in it overnight unless it closes strong. Otherwise, it will probably be an intraday trade.
PPH – Pharmaceutical Index HOLDR ETF
Sector: Pharmaceutical
Long
Trigger =
A PULLBACK DOWN TO 76.65 OR LOWER
Target = 78.25
Stop = 75.70
Notes = PPH was a great fade on the short side yesterday, but the bigger picture of the Pharmaceutical sector is that it has broken out of consolidation from last week and now has big support just underneath. Yesterday’s strong afternoon rally in the DRG sector put the index near its breakout highs again with only two days of minor overhead resistance. However, I don’t like the risk/reward ratio of entering here unless it pulls back to support around 76.65 first. If it doesn’t do so, we will not buy it. So, just to reiterate, we are only looking at buying this on a pullback to the trigger price.
Deron’s Report Card:
Both the DIA and PPH shorts triggered and worked out great. PPH tanked almost immediately after the open, which makes being able to sell short on a downtick especially beneficial! Per the e-mail I sent to you, we used a tight trailing stop going into the afternoon session which enabled us to lock in most of our profits as the markets rallied into the afternoon. PPH also exceeded our profit target of 75.95 intraday.
With the SPY and SWH shorts, we stuck to the plan discussed in yesterday morning’s report, which was to cover half of the shares on the market open and lower the stops to just below breakeven on the rest of the shares. I covered the first half of SPY at 94.90 and SWH at 27.24. The second half of our shares never hit the breakeven stops and we subsequently tightened the stops in the afternoon, along with DIA and PPH. By covering only half of the shares on the open, we effectively lowered our risk, locked in some profits, and also allowed the remaining 50% of our positions to drop lower for maximum profit. Covering half on the open is a great strategy in situations such as yesterday. Average cover prices on the entire positions are listed below.
Closed Positions:
-
SPY short – shorted 95.89, covered 94.42 (average), closed with + 1.47 points
PPH short – shorted 77.35, covered 76.10, closed with + 1.25 points
DIA short – shorted 89.07, covered 88.10, closed with + 0.97 point
SWH short – shorted 27.51, covered 26.87 (average), closed with + 0.64 point
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.
SOH = Sit On Hands (Don’t Make Trades)
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