Commentary:
Yesterday morning’s pre-market patriotic rally quickly faded as soon as the markets opened. We played it well by sticking to our gap rules, which kept us out of trouble by preventing us from entering any long positions after the open. As anticipated, the Dow ran into resistance in the 87.50 to 88.00 range and trended down the entire trading session which enabled us to profit on our DIA short fade play.
Yesterday’s gap-up and subsequent selloff created numerous bearish head and shoulders patterns on the daily charts, especially with the Dow, which topped out exactly at the high of the left shoulder yesterday. However, on the 60-minute charts, these head and shoulders patterns are also forming inverse head and shoulders patterns, which is bullish. So, it’s a bit too early to determine if the pattern will follow-through to the downside, but you definitely need to be aware of this bearish pattern that is setting up. The action over the next week or two will determine the probability of whether or not it follows through to the downside, which would also result in new 52-week lows.
The direction of today’s trend will be largely dependent on whether or not volume returns to the markets. Keep in mind that the rally we saw on Tuesday and into Wednesday morning was based largely on anticipation of a relief rally after the passing of September 11. In other words, it was a case of “selling the news” now that the event has passed. Since the two-day rally was inflated, we will see the true direction of the markets during the next several days.
Today’s watch list:
SMH – Semiconductor HOLDRS ETF
Sector: Semiconductor
Long
Trigger = 24.70
Target = 26.15
Stop = 24.10
Notes = We like the relative strength this sector has been showing for the past couple of days. The old economy sectors such as Utilities and Transports have been drags on the Dow, but the SOX has been giving the Nasdaq relative strength, which is confirmed by the fact that the SOX index closed positive yesterday, even though the S&P closed slightly negative. We anticipate the SOX will rally on any attempt at broad market stabilization, especially given the fact that the SOX index is building a solid support level here.
SPY – SPYDERS (S&P 500 Tracking Stock)
Sector: n/a
Short
Trigger = 90.90
Target = 89.55
Stop = 91.65
Notes = We are looking to short SPY on a break of the 200 period moving average on the 60 minute chart, which would also confirm a break of the lower channel support of the uptrend that started on September 4. This would also indicate a break of the 20 day moving average on the daily chart. Our target is just below the 0.618 Fibo retracement off the recent rally. Remember the gap-down rules for entry (wait break of first twenty minute low before shorting).
Deron’s Report Card:
We shorted DIA into the gap-up as a fade play and covered incrementally on the way down. We planned on taking the second half of our position overnight, but our 50 cent trailing stop got hit around 3:00 pm as the markets attempted to reverse the selloff. Worked out to be a solid profit for us regardless.
Closed Positions:
- DIA short – shorted 87.60 (average), covered 86.79 (average), closed with + 0.81
MDY long – (never triggered per gap-up rules — prevented a loss!)
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