Commentary:
Once again, yesterday’s opening gap up quickly faded and was filled within the first thirty minutes of trading. Upon filling the gap, the S&P attempted to rally back to the opening highs, but ran into resistance of Monday’s highs. From that point on (around 12 noon EST), the S&P and Nasdaq both resolved into steady downtrends, aided by a weak Consumer Confidence report. This made for some decent intraday shorting opportunities, but nothing I was comfortable swing trading overnight. Most notable yesterday was the relative weakness in the Nasdaq, which was led by the Semiconductor Index. The SOX closed down nearly 6% on the day due to the reaction on Intel’s bearish comments before the market open. Guess that kind of messed up our plans for a reversal in the SOX yesterday, right? Compare these two charts and you will see how much weaker the Nasdaq was compared to the S&P:
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Notice how yesterday’s low in the S&P was equal to Monday’s low? However, the Nasdaq blew right through Monday’s low shortly after 12 noon. Also notice how little the Nasdaq rallied around 11 a.m. compared to the S&P, which nearly tested its opening highs. Whenever you see this type of divergence between two major market indexes, you definitely want to pay attention to it because it usually indicates which sectors you might expect to be strong or weak going into the next trading day. Some of the stronger sectors yesterday were Gold, Oil, Chemicals, and Banks. Based on that divergence, I would expect more continuation with the non-technology, old-economy sectors being stronger than the tech stocks today.
Today’s watch list:
QQQ – Nasdaq 100 Index Tracking Stock
Sector: n/a
Long
Trigger =
24.60
Target = 25.55
Stop = 24.05
Notes = Despite the divergence in the markets yesterday, we will be looking to buy QQQ today if, and only if, we get confirmation that the uptrend on the daily chart is going to hold. As you can see from the daily chart above, the Nasdaq is now sitting at perfect support of its trendline, with the 20 and 40 day MAs directly underneath as additional support. This is a critical point because if the rally of the past several weeks is going to hold, this is where the market needs to turn. If we are right, we got long at a great price. If we are wrong, the risk of entering right on trendline support is minimal.
Although I do think the Nasdaq will reverse back up here, it usually does not occur in a smooth manner. Therefore, I would not be surprised to see a reversal pattern today, with weakness in the morning and strength into the close. That would either form a bullish hammer or doji reversal candlestick on the daily chart. If we see that type of formation, it would set us up to get a little more aggressive on the long side. But until then, let’s keep the position size and trade activity to a minimum.
SMH – Semiconductor Index HOLDR ETF
Sector: Semiconductor
Long
Trigger = 25.70
Target = 26.95
Stop = 25.15
Notes = My intuition tells me that the bearish Intel news will be quickly forgotten due to change in short-term market sentiment we have seen during the past few weeks. I could easily be wrong about that, but we are willing to take a calculated risk here for pretty much the same reasons that I like QQQ long here. The chart is screaming at me to go long and just put a stop below the trendline. Until the daily chat proves otherwise, we need to assume the multi-week trend will continue up. Just make sure you are disciplined out there and don’t pull the trigger unless there is a good reason to.
Deron’s Report Card:
PPH triggered after the market sold off and it pulled back to our entry price of 76.65. Shortly after triggering, PPH rallied to put our position nearly a point in the money. As many of you know, I routinely use trailing stops once a position is a point in the money, and that is what I did with PPH by subsequently setting a stop just below breakeven at 76.50. Our stop got hit in the afternoon as the market collapsed.
If you did not raise your stop to breakeven after entering PPH, don’t worry about it. There are many times when keeping your original stop without raising it results in more profits because it prevents you from getting shaken out with too tight of a stop. Whether you trailed a stop to near breakeven or whether you kept your original stop of 75.70, the most important point is to make sure you had a stop and were disciplined enough to use it. As long as you keep the losses tight, you’ll live to see another day in the business.
SMH long did not trigger.
Closed Positions:
- PPH long – bought 76.65, stopped out at 76.33, closed with (0.32)
SMH long – never triggered
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