Commentary:
Friday’s market action could best be characterized as a bear trap that lacked the necessary volume to really go anywhere. The markets gapped up above the highs of the previous day (which closed weak) and created a bear trap because it trapped traders who were expecting the markets to continue lower on Friday. The gap was caused by a relief rally on the heels of numbers from Intel that were within analysts’ expectations. However, volume was once again light on both the Big Board and the Nasdaq which prevented the rally from ever getting any legs. All the major market indices traded in a relatively tight range on Friday which did not allow for many profitable trades other than a few scalps worth 20 cents (such as our QQQ and SMH longs).
The Nasdaq had more relative strength than the S&P on Friday, especially in the morning when the S&P nearly filled the gap from the previous day’s close but the Nasdaq held up well and consolidated near the high of the gap-up. The S&P stabilized after the morning reversal period, but failed to rally back above the opening high until about 3 pm. The Nasdaq was in an uptrend for most of the day, but within a tight range. We took profits on our long positions early in the afternoon in anticipation of a selloff into the close, which is exactly what happened beginning at 3:00 pm. It seemed unlikely to us that traders would want to be long over the weekend, which was confirmed by the lack of volume on Friday.
You probably don’t need us to tell you that the lingering concern over how to deal with Iraq, as well as fear of another attack this Wednesday (September 11), has been and will likely continue to be a drag on the markets. We really don’t think there will be any big money taking positions until one or both of these issues have passed. Therefore, we expect the markets to be choppy and in a trading range until these issues have passed. Although it is a bit boring, we will continue to take a conservative stance with each and every one of our trades because capital preservation is always our number one priority. As such, we will probably be going cash every night simply because there is too much that can happen in the world within the 17 hours each day between the market’s close and re-open.
Both the S&P and Nasdaq futures are gapping down this morning, putting both indexes near Friday’s low if they were to open at current prices. Friday’s gap should serve as price support, but if the markets open near Friday’s lows, that will create a lot of concern and overhead resistance from the bulls who bought Friday’s rally and held over the weekend. Therefore, unless the markets can get above Friday’s highs, I think we are in for another choppy and boring day. Remember that S.O.H. (sit on your hands) days do not mean you can’t be productive as a trader because those days make the perfect opportunities to research ETFs, study charts, or rearrange your data workspace.
Today’s watch list:
PPH – Pharmaceutical Index HOLDR ETF
Sector: Pharmaceutical
Short
Trigger = 71.45
Target = 68.87
Stop = 72.62
Notes = The most interesting thing about the Pharmaceutical index is that it was the only sector we follow that closed in the red on Friday (down 0.21%). This relative weakness to the S&P means that the index will probably be among the first sectors to selloff in the event of market weakness today. What occurred on Friday was sector rotation out of the “old economy” sectors and back into the tech stocks such as the Semis, Internets, and Software. If there is follow-through into the tech stocks again today, there is a good chance this sector will be weak again.
We are looking to short PPH on a break below the lows of the past three days, which also would represent a break below the 50-day moving average. Our stop is a break above the upper channel of the downtrend from August 27. Our target represents a 50% Fibo retracement off the rally from July 24 to August 22, which also correlates with the low of July 29.
SMH – Semiconductor Index HOLDR ETF
Sector: Semiconductor
Long
Trigger =
23.85
Target = 24.90
Stop = 23.25
Notes = The SOX index was among the strongest sectors on Friday, closing up nearly 5% on the day and breaking above the upper channel of a multi-week downtrend. Since it was the first reversal day, we expect at least another day of follow-through to the upside, but remain concerned that volume has been so light in the index, as well as the broad market.
We will be looking to buy SMH if it breaks above Friday’s high, which also would constitute a break of the resistance of the gap from September 3 (notice how that gap stopped the rally on Friday). Our target is the resistance of the gap down from August 28. We are setting our stop just below Friday afternoon’s lows into the close.
Deron’s Report Card:
Although we usually wait for a break of the 20-minute opening highs before taking any long positions that have gapped up beyond our trigger prices, there are rare occasions when enough factors come together to enable us to buy on a pullback off the highs, rather than wait for a break of the opening 20-minute high. The biggest thing we liked on Friday morning was that even though the Nasdaq failed to set a new high within the first twenty minutes, it did stay within the opening low of its gap and consolidated, which usually leads to higher prices. That is why we entered both SMH and QQQ on a pullback off the highs, rather than waiting for a break of the opening gap.
Buying a gap-up without waiting for a break of the opening 20-minute highs is a trade that I recommend only advanced traders attempt on their own because it can often be very tricky. The most important thing when doing so is to use a tight stop that is just below the low of the day, which is where we set our stops on both QQQ and SMH. Therefore, even if you are wrong, the risk is minimal. We are currently publishing a detailed article that explains the various scenarios that can occur when the market gaps and will e-mail it to you upon completion.
Closed Positions:
- QQQ long – bought 22.77, sold 23.02, closed with + 0.25
SMH long – bought 23.48, sold 23.57, closed with + 0.09
BBH short – 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