Commentary:
Yesterday’s weakness put the Nasdaq below the critical support levels of the 20 and 40 day moving averages, as well as the lower channel of the uptrend on the daily chart that we spoke of. From a technical standpoint, this is a very bearish signal because the Nasdaq should have attempted to rally off support into the close if the uptrend is going to remain intact. However, the S&P 500 index is still above both the 20 and 40 day moving averages, so we are continuing to see divergence between the two indexes. The S&P bounced perfectly off its 20 day moving average, which should now act as support:
Let’s not forget that we are still in a pre-holiday week. My observation yesterday is that the selling was not from an abundance of sellers, but rather a lack of buyers. A quick look at the intraday chart of the S&P shows non-committal, choppy performance from about 1 pm through the close. It really only takes one or two big sellers in the market to drive prices lower when there is not much big money around to prop prices up. Therefore, I am still not inclined to say the uptrend is definitely over, but yesterday’s technical breakdown in the Nasdaq certainly makes me much more cautious. Although we generally do not base trades on fundamental analysis, I have a feeling that the current indecision over what to do about Iraq is adversely affecting the markets (especially Cheney’s comments a few days ago). It will be interesting to see what the post-holiday trading brings in the beginning of September.
The weakest sectors yesterday were primarily technology related. None of the sectors we follow closed in the green. However, defense sectors such as Gold, Utilities, and Pharmaceuticals closed nearly flat on the day. Here is an overview of the weakest sectors yesterday:
Networking Index (NWX) = (6.13%)
Internet Index (GIN) = (4.26%)
Semiconductor Index (SOX) = (4.12%)
Software (GSO) = (3.70%)
The bad news is that we were wrong about the Nasdaq and Semiconductors reversing yesterday. The good news, however, is that we stayed out of trouble because neither of our plays triggered for entry. This is why it is crucial to only enter our trade ideas if they hit their exact trigger prices or better. By not entering either of our plays yesterday, we protected our profits from the beginning of the week. Our goal is never to be in the markets every single day; rather, our goal is to make consistent profits over the long run. By only trading days that give us clear signals, we greatly enhance our odds of profitability week after week and month after month.
Today’s watch list:
MDY – MidCap SPDR
Sector: n/a
Short
Trigger =
80.40
Target = 78.10
Stop = 81.25
Notes = Notice how MDY has broken the lower channel support of the uptrend from July. After testing support of its 20 and 40 day moving averages yesterday, the index managed to close just above both of them. However, if MDY gets back down below the moving averages AND yesterday’s low, it will confirm a technical breakdown. In addition, it will have broken support of the highs of August 9 – 13.
Remember that standard gap rules apply — If there is an opening gap down to our trigger price, we will wait for a break of the 20-minute opening low before selling short. It is also a good idea to keep an eye on the S&P index because if the S&P holds support of its 20 MA, it will make it more difficult for MDY to fall apart. Please keep in mind that we are trading with very reduced share size until after the holiday.
PPH – Pharmaceutical Index HOLDR ETF
Sector: Pharmaceutical
Long
Trigger = 76.10
Target = 77.50
Stop = 75.25
Notes = The Pharmaceutical Index is one of the few sectors that has not yet broken any technical support levels on the daily chart. This relative strength indicates it will probably be one of the first sectors to rally when the broad market does. I also feel more comfortable having a long setup that trades with the S&P versus the Nasdaq because of the price divergence we have seen between the two indexes during the past few days. However, due to the market weakness, we are once again making the price confirm the rally by setting our trigger price above several days of price resistance. As always, if it does not hit our exact trigger price, forget about it!
On an educational note, one of the reasons PPH has been holding up so well is because of the big support base it has in the 74 – 75 range. The longer of a consolidation period an index or stock has before breaking out, the more support that consolidation will serve as when the stock pulls back down to the pre-breakout level. If there was only a few days of price support at 74 instead of a month’s worth of support, PPH would probably be below 74 by now.
Deron’s Report Card:
Closed Positions:
- QQQ long – never triggered
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