Commentary:
Yesterday was a perfect example of why we always use the 20-minute opening gap rule before entering a trade that has triggered due to a gap down. As you probably know, the 20-minute opening gap rule states that whenever a trade immediately hits its trigger price due to a gap up or gap down on the open, we only enter the trade if it subsequently sets a new low or new high beyond its range of the first 20 minutes. The reason we have this rule is because a majority of gaps (both up and down) fail going into the first reversal period, which usually occurs within the first twenty minutes of trading. The rule prevents us from entering trades at the low or high of the day and quickly getting stopped out due to a quick reversal. Although the rule will sometimes cause us to miss a profitable trade, a majority of the time it prevents us from losing money, which is much more important.
One of yesterday’s plays was to short MDY if it traded below 80.40. However, I also reminded everyone to use the 20-minute opening gap rule. MDY triggered immediately on the open with an opening price of 80.10. During the next 20-minutes, MDY (and the broad market) consolidated at the lows, but only traded about 5 cents lower than its opening price. At exactly 9:50, the market began rallying hard and continued to do so for most of the day. MDY never traded below its opening 20-minute low and rallied all the way to over $82. If we did not have our gap rule in place, that would have surely become a losing trade. This is why it is important to always have an opening gap rule that you follow.
After the morning gap down was filled, the markets tried to continue the rally, but had a difficult time going much higher due to overhead resistance of both the 20 and 40 day moving averages. Although probing through them intraday, the markets did not have enough momentum to continue the rally and sold off into the close. Given the fact that both the S&P and Nasdaq closed well off their intraday highs, today could be very choppy or rangebound. Most importantly, I expect volume to be very light today, as many traders will be taking the day off to create a synthetic 4-day weekend. Remember that light volume enables the market to get whipped around easily because of the lack of big money on both sides of the market. My best trading advice for you today is to take the day off just like much of The Street will be doing. It may be the most profitable thing you could do today. But, if you insist on trading (not recommended), here are a few plays to watch for:
Today’s watch list:
SMH – Semiconductor HOLDR ETF
Sector: Semiconductor
Long
Trigger =
25.06
Target = 26.00
Stop = 24.50
Notes = There is a good chance this will not trigger today due to the warning from SUNW. However, the SOX index finally showed signs of life again yesterday and formed a doji reversal candle on the daily chart. If SMH can get above its 2-day high of 24.96, it will probably at least fill the gap down from August 28. More importantly, SMH will have broken the upper channel of its downtrend on the 60-minute intraday chart, which should invoke some short covering as well. Notice how closely the 20 period moving average corresponds with the trend line on the chart above.
THIS IS A DAY TRADE ONLY. WE WILL NOT BE TAKING ANYTHING OVER THE HOLIDAY WEEKEND.
DIA – DIAMONDS (Dow Jones Industrial Average Tracking Stock)
Sector: n/a
Short
Trigger = 86.10
Target = 84.75
Stop = 86.90
Notes = The Dow attempted to reverse yesterday, but has broken support of its uptrend from July 24. We are looking for DIA to drop back down below its 40 day moving average, which will subsequently serve as overhead resistance.
THIS IS A DAY TRADE ONLY. WE WILL NOT BE TAKING ANYTHING OVER THE HOLIDAY WEEKEND.
Deron’s Report Card:
The QQQ long trade that I e-mailed to everyone worked out well and became a profitable day trade for us. Other than that, we just continue focusing on protecting our profits during this pre-holiday week.
Closed Positions:
- QQQ long – bought 23.61, sold 23.97, closed with + 0.36
MDY short – never triggered due to opening gap rule
PPH 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