Commentary:
After selling off and filling the gap from September 6 yesterday morning, the S&P found support and staged a solid rally that traded as high as the 50-day moving average intraday and resulted in a close above the high of September 6. The Nasdaq followed suit with the exception that it did not sell off low enough to completely fill the gap. When a market is able to drop below the previous day’s low and rally back to close above the previous day’s high, that is obviously a bullish signal that indicates buying on weakness. However, the same two factors that concerned me last Friday were also present yesterday: lack of volume and weakness into the close.
Total volume on both the NYSE and Nasdaq yesterday was the lightest we have seen in the past five trading days. Therefore, it is hard to give much credence to the validity of the rally because the volume has not confirmed the move. Remember that volume is the single most reliable technical indicator that exists and to ignore volume is foolish. Light volume rallies typically tell us there is more a lack of sellers rather than an abundance of buyers present in the markets. As such, on big player who decides to sell can easily stop the rally dead in its tracks. Although we made some profit on SMH long yesterday, we did not want to get too aggressive on the long side due to the continuing lack of volume.
The second interesting point to note about yesterday was the selloff we saw into the close, which was the same pattern we saw on Friday. This indicates to us there is a lack of willingness for many traders to take long positions, even profitable ones, overnight. Frankly, we can’t blame them because we are presently reluctant to take positions overnight as well.
The light volume we have been seeing over the past few days has reduced the opportunities for an abundance of quality trade setups. As such, we have been forced to be very selective in looking for trades that offer minimal risk and a decent profit potential. Although we prefer to aim for trade setups that offer multiple-point profits over a several day period, we always have to take what the market gives us. Right now, a 50 cent profit is the best we can expect to do, but it all adds up to a positive P&L. There will be plenty of opportunities for larger profits once the volume returns to the markets.
We expect the light volume and the pattern of selling off into the close to continue through today, especially given the one-year WTC attack anniversary that is coming up tomorrow. Be very skeptical of a rally today and quick to take profits on the long side because it is not probable any significant rally will last into the close. Once again, we will be 100% cash overnight.
Today’s watch list:
MDY – Mid-Cap SPDR ETF
Sector: n/a
Long
Trigger = 82.15
Target = 83.05
Stop = 81.60
Notes = The first thing that caught our attention with this setup was yesterday’s strong volume, which was the highest volume day MDY has seen in two weeks. For some reason, and it does not really matter why, there was buying interest in this ETF yesterday. MDY is also one of the few ETFs that is above all its major moving averages on both the 15 and 60 minute charts.
We are looking to buy MDY on a break above yesterday’s high, which also puts it above the 20 day moving average. Our target is the highs of July 12 and 17, which also correlates with the upper channel of the downtrend from August 22. Remember this is a DAYTRADE only, so targets and stops have been adjusted appropriately.
DIA – DIAMONDS (Dow Jones Industrial Average Tracking Stock)
Sector: n/a
Short
Trigger =
84.40
Target = 83.30
Stop = 85.10
Notes = The Dow rallied up to the upper channel of its downtrend on the daily chart yesterday with very light volume. This makes me cautious of a selloff in the Dow, especially if broad-based selling hits the market today.
We are looking to short if DIA gets back below the levels it just broke out from, which would indicate a failed breakout. The target is yesterday’s low. The stop is just above Friday’s high. Remember this is a DAYTRADE only, so targets and stops have been adjusted appropriately.
Deron’s Report Card:
Per the intraday update email we sent yesterday, we legged into SMH by initially buying a half-position and adding to it once we were in the money. We subsequently took our profits before the weakness into the close.
Closed Positions:
- SMH long – bought 22.93 (average), sold 23.42, closed with + 0.49
PPH 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