Yesterday was a very tricky day for trading as the markets whipsawed in the morning and stayed in a trading range throughout the afternoon. The strange brew began when the markets gapped down after closing near the highs on Wednesday. This is unusual, especially after a reversal day. When this occurs, there is usually an attempt to fill the gap by ralling back up to the previous day’s close. In fact, we set our stops on the QQQ and SMH longs below Wednesday’s lows because we felt there was a good chance the lows would not be broken very easily. However, when bad economic news hit the wires at 10:00 AM, both the S&P and Nasdaq quickly lost support and broke the lows of not only Wednesday, but also Tuesday. Looking at a daily chart of the S&P, it would appear there was not much price support after the S&P broke below 875. However, within an hour of breaking that critical support level, the S&P had already rallied back to test the high of the morning session. After breaking the morning highs, the S&P rallied all the way back up to fill the gap, but only after breaking critical support. Notice how the rally stopped dead in its tracks immediately after the gap was filled:
After filling the gap, the S&P formed a double top in the afternoon and just chopped around for the rest of the day, closing in the middle of its range. The Nasdaq followed suit for most of the day, with the exception that there was more relative weakness in the Nasdaq than in the S&P. The type of trading action we saw yesterday is very difficult to profitably trade without chopping yourself to pieces. We certainly cannot expect every day to be profitable and need to make our focus just staying out of trouble on the non-profitable days. The best we can hope to do on a day like yesterday is simply protect our capital, which I think we did a pretty good job of by taking advantage of the morning short in SPY, but laying low for the remainder of the day.
I honestly don’t have much of an opinion on what to expect going into today. I got the sense yesterday that the market is trying to put in a bottoming pattern because the S&P recovered off the break of the 3-day low and closed above Wednesday’s low. However, the Nasdaq continued to be relatively weak and closed below Wednesday’s low. I think it will only take a little bit of good news to make the markets rally from here, but when you combine the indecision over how to handle Iraq and fear of another terrorist attack on the upcoming anniversary of September 11, it seems to me that most traders will not be taking serious positions in the market anytime soon. This is evidenced by the light volume we have been seeing across the board.
Finally, Intel’s report after the close yesterday caused a rally in the Globex futures after hours that has held strong overnight into this morning’s session. If the gap up holds going into the first morning reversal period, there would be some trapped shorts that could aid in the possibility of an uptrending day. The fact that the futures gap is primarily limited to the Nasdaq is quite interesting and makes me think we will see a rally in the tech stocks today (assuming the gap holds). Nevertheless, let’s continue to be cautious for the next week or so until some of the aformentioned issues are resolved.
Today’s watch list:
SMH – Semiconductor Index HOLDR ETF
Target = 24.06
Stop = 22.19
Notes = Yesterday’s long setup in the Semiconductor index did not trigger because we were probably one day early. However, the after-hours report from Intel (although not that great) is being interpreted by the market as positive. If the real reaction is a bounce in Intel today, this should bode well for the beaten down Semiconductor stocks.
Again, we will not be blindly buying or bottom fishing because we are only looking to enter the trade if it breaks above yesterday’s high, which would also confirm a break of the upper channel of the downtrend from August 22. This can be clearly seen on a 60-minute chart, which also correlates with the 20-period moving average. Our stop will be just below yesterday’s close, which should serve as support. The target is the closing of the gap down from August 30. Because of this morning’s gap up, we will only buy SMH if it breaks its 20-minute opening high. Remember how this gap rule has kept us out of trouble so many times in the past, so we feel it is crucial to have a similar rule in place.
QQQ – Nasdaq 100 Index Tracking Stock
Trigger = 22.65
Target = 23.50
Stop = 22.15
Notes = The charts of QQQ are very similar to SMH because the Semiconductor Index usually leads the Nasdaq. As such, we will also be looking to buy QQQ if it breaks yesterday’s high, which confirms a break of the upper channel of the downtrend from August 22. Just like with SMH, this would indicate a break of the 20-period moving average on the 60-minute chart. The stop is yesterday’s close. The target is also the closing of the gap down from August 30. Remember the gap rule!
BBH – Biotechnology Index HOLDR ETF
Trigger = 77.90
Target = 75.90
Stop = 79.20
Notes = Although it is not likely this BBH short will trigger today, it should work out to be a good play if the market loses the gap and trends down instead. The Biotechnology index has been consolidating at the lows for the past three days, and we will be looking to short on a break of the support at 78. Our stop is the 20 period MA on the 60-minute chart. Target is the high of July 17.
If you have never traded BBH before, please know that it is quite a volatile stock. As such, we trade minimal share size when trading this ETF. Even with one or two hundred shares, this can still be a profitable ETF to trade.
Deron’s Report Card:
The SPY short that was emailed to everyone yesterday worked out well for us. We covered half of the position near the bottom of the morning selloff and used a break-even stop on the second half of the position. The second half hit the break-even stop, but the overall trade still yielded a profit.
SMH and QQQ longs from overnight got stopped out because the market did not have follow-through from its close at the previous day’s highs.
XLF short triggered, but stayed in a trading range for most of the day and did not really act too weak. As such, we covered for a tiny loss.
- SPY short – shorted 88.27, covered 87.91 (average), closed with + 0.36
XLF short – shorted 22.26, covered 22.30, closed with (0.04)
QQQ long – bought 22.77, stopped out 22.12, closed with (0.65)
SMH long – bought 22.80, stopped out 22.20, closed with (0.60)
SMH long (re-entry) – never triggered
OIH 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