As expected, there was a lack of commitment on both sides of the market going into the long holiday weekend. Although both the Nasdaq and S&P held up okay for most of the day, the selling into the final hour of the day made it obvious traders did not want to gamble over the weekend. We were adamant about being cash over the weekend because of the selling we anticipated into the close. Neither of our plays triggered on Friday and we were perfectly happy with that! As we always say, the most profitable thing to do is often absolutely nothing! Doing so on Friday enabled us to protect our gains from earlier in the week.
Last week’s noncommital market action and light volume made it difficult to forecast the true short-term direction of the markets. However, activity should slowly begin to pick up this week as traders and investors return from their vacations and get back to work. Over the next few weeks, we will gain a good sense of whether or not August’s rally marked a bear-market reversal or was simply a technical bounce before setting new 52-week lows.
Realize that bear-markets rarely end by forming V-bottom reversals off the lows, as we saw in the Fall of 2001. More commonly, they bounce sharply off the lows, test the former low, rally back to the former high, and basically just go sideways for a long time before recovering. That does not mean we are going to see that scenario this time around, but it is the most common way that bear markets have historically recovered. Whether we form a double bottom on the daily charts and begin the recovery process or whether we set new lows, we’ll be ready either way with low-risk ETF trades.
Today’s watch list:
SPY – S&P 500 Index Tracking Stock
Target = 88.05
Stop = 92.10
Notes = SPY is now at a critical point, having closed slightly below both the 20 and 50 day moving averages on the daily chart. A break below last week’s low of 90.81 would indicate confirmation of the inability to stay above those key moving averages in the short-term. More importantly, the lower channel support of the uptrend from July 24 has been broken and now stands as overhead resistance.
Since the markets are gapping down this morning, the usual opening gap rules apply. We will NOT short SPY unless it trades below the low of the first 20 minutes. This reduces the odds of us getting trapped on the short side due to a large gap down.
DIA – DIAMONDS (Dow Jones Industrial Average Tracking Stock)
Trigger = 85.65
Target = 83.30
Stop = 86.90
Notes = We like DIA short for the same reasons as the aforementioned SPY short. The technical setup on the daily chart is the same. Same opening gap rules also apply, as mentioned above.
Deron’s Report Card:
Neither of our plays triggered on Friday, which we were perfectly happy with.
- DIA short – never triggered
SMH long – never triggered
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
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
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
Unless otherwise noted, average holding time is 2 days to 2
weeks once a position is triggered. Updates on open positions are provided
Yours in success,
Deron M. Wagner