Commentary:
Yesterday’s trading action was indicative of a classic “reversal day.” The market initially rallied on the open, ran into resistance of Tuesday’s congestion zone, sold off down to Tuesday’s low, formed a double bottom, and rallied back in the afternoon to set new highs of the day going into the close. This is the type of pattern that we commonly see after several consecutive trending days and often indicates a short-term reversal in the opposite direction (up in this case). Statistically, this is the most common pattern we see on reversal days because it is not common to have a smooth-trending day on the first day of a market reversal. This type of market action usually forms a reversal candle on the daily charts such as a “doji star” or a “hammer.”
We took some long positions overnight due to the reversal pattern in the afternoon, as well as the fact that the markets were poised to close near the highs of the day. Although there is typically upside follow-through the next morning when indexes close at the highs of the previous day, the futures markets are gapping down significantly so far this morning. The key will be to see how the market acts going into the first reversal period at 9:50 a.m. If the markets can shrug off the gapdown and hold yesterday’s lows, we could see another strong day today. However, if yesterday’s lows are violated in the major indexes, there is likely to be some strong selling due to bulls who bought yesterday afternoon’s rally. In the event yesterday’s lows are broken, there will probably be some solid short setups out there, especially on the SPY and DIA. Since we have not listed these two trades below, we will e-mail any additional trade ideas to you if that occurs.
Today’s watch list:
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SMH – Semiconductor Index HOLDR ETF
Sector: Semiconductor
Long
Trigger =
23.65
Target = 25.20
Stop = 23.10
Notes = Yesterday morning, the SOX traded intraday to a new 52-week low, which is very bearish. However, the index rallied in the afternoon and actually closed above the previous day’s low, near yesterday’s high of the day. This formed a bullish candlestick pattern, which I have circled on the daily chart above, known as a “hammer.” A break above yesterday’s high would confirm a short-term reversal by putting SMH above the upper channel of the downtrend from August 22. That would probably provide the necessary momentum to rally the SMH tracking stock into the gap down from August 28 (around $25).
Even though we already have a long position in SMH from overnight, we will be adding to the position if it gets above yesterday’s high and trades through 23.65. When you read the “report card” below, notice that the stop for the overnight long position of SMH is different than the stop for this trade setup because we entered the initial position of SMH at a lower price. Therefore, if this trade triggers, we will be treating it as a totally separate trade.
XLF – Financial Select Sector SPDR
Sector: Financial/Banking
Short
Trigger = 22.55
Target = 21.60
Stop = 22.90
Notes = The Banking Index (BKX) broke below the 20 day moving average two days ago, which constitutes a break of the uptrend on the daily chart. Yesterday, it attempted to rally back, but was not able to get above Tuesday’s high. As it stands, the 40 day moving average is now acting as resistance. If the associated XLF Financial Sector ETF gets back below 22.55, it will be back below the 20 and 40 period moving averages on the 15 minute chart. In addition, it will again be near Tuesday and Wednesday’s lows, which should aid in a break to a new 3-day low. The target is just above a 50% Fibonacci retracement from the low of July 24 to the high of August 22. Remember the opening 20-minute gap down rule!
Deron’s Report Card:
We shorted PPH when it triggered and actually got filled significantly higher than the trigger price, which was a good thing considering we stopped out on the trade. Per the intraday update email, we took the stop early on PPH due to the reversal we sensed going into yesterday afternoon. Taking the stop early proved to be a good thing considering that PPH ran more than a point above where we took our stop.
SMH missed our trigger price by two cents in the morning, so we did not initially enter. However, we lowered our trigger price (per the email) because we liked the way it was acting going into the afternoon session. That worked out well because it reversed and closed near the highs going into the close. Adjusted stop price is listed below on the open position.
QQQ triggered in the morning and subsequently traded down to our stop by a penny. Because it looked like selling momentum was slowing, we made a judgment call to give the stop another 5 cents against me, but it never hit it. So, we are still long from yesterday. New stop price listed below.
Closed Positions:
- PPH short – shorted 72.35, covered 72.65, closed with (0.30)
Open Positions:
- SMH long – bought 22.80, new stop at 22.20, target still 25.20, open with + 0.44
QQQ long – bought 22.77, new stop at 22.14, target still 23.78, open with (0.04)
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