Commentary:
Yesterday brought no relief from Wednesday’s selling as Bush’s U.N. presentation provoked more fear of a war with Iraq. Combined with Greenspan’s comments yesterday, the markets became quite spooked. As technical traders, we normally do not pay much attention to fundamental factors such as these. However, the reason we point these things out to you is to let you know that substantial fundamental or political events often lead to inability of technical analysis to follow-through. Therefore, while we do not want to dilute our attention too much from the technical indicators that we know work consistently over time, it is foolish to go about the trading day without paying any attention to “the big picture” of what is really driving the markets.
The gap-down in the S&P yesterday morning that put the index right on the 900 support level immediately after the opening. By the time we entered the first twenty minute reversal period, the S&P had already dropped another 5 points to 895, an even more significant support level on the 15-minute intraday charts (200 period moving average). The fact that the market dropped so far in such a short period of time is what made us reluctant to enter our SPY short setup after the opening twenty minute low was established. When the markets started to find support and settle into a trading range in the late morning session, we tested the waters by entering a few long positions with tight stops. Even though we got stopped out with small losses on both of them, there was a good reward/risk ratio at our entry points. Going into the afternoon, the S&P eventually broke the morning support level, but we never felt the reward/risk ratio of getting short SPY was a good one. We did, however, get short the Retail sector, which is working out well for us thus far.
Because we always err to the conservative side, we are sometimes going to miss big moves in the market that did not offer us a low-risk entry point. Over the long-term, I GUARANTEE that waiting for low-risk setups is a much more profitable way to trade because it only takes a few big mistakes to wipe out a substantial portion of your trading account. We simply need to be patient and wait for the low-risk setups to come along because CAPITAL PRESERVATION is ALWAYS our top priority!
Going into today, we anticipate a bit more downside follow-through in the early morning. However, we would be cautious about entering new short positions in the major indices here because we are starting to get technically oversold in the short-term. On the other hand, there is really no reason to aggressively look for long entries here either. There is also a slew of economic reports coming out later this morning including PPI, Retail Sales, and Michigan Sentiment.
For those of you who reported still being short DIA from our entry on Wednesday morning at 87.50, we recommend using a tight trailing stop today to lock in profits. A 4-point profit in our current environment is a gift, so don’t get greedy! For those who are all cash, today could easily being a SOH (Sit On Hands) day, especially given the fact that it is a Friday and it seems unlikely that traders will be excited about taking positions over the weekend given the current state of world affairs.
Today’s watch list:
PPH – Pharmaceutical HOLDRS ETF
Sector: Pharmaceutical
Short
Trigger = 71.27
Target = 68.85
Stop = 72.28
Notes = Although we don’t like any of the major market indices for short entries here, there are a few sectors such as pharmaceutical that are lagging the market and appear poised to crack. We will be looking to short PPH on a break below its 50-day moving average, which would also set a new one-month low. Our target is the high of the gap from July 29. Stop is yesterday’s close.
XLF – Financial Select SPDR ETF
Sector: Financial
Short
Trigger = 21.99
Target = 20.95
Stop = 22.38
Notes = The BKX (Banking) index broke the lower channel support of its daily uptrend yesterday and got smashed. It is now on the verge of losing major support, which would drag XLF with it. We are looking to short on a break below the low of September 5. Our stop is just above yesterday’s close and the target is the low of August 5.
For those who have never traded XLF, be aware that it normally has low volatility and a tight trading range. Therefore, we usually increase our position size appropriately when trading this ETF. You may wish to download our Excel position size calculator in the Client Access area of our web site to aid you in determining the ideal share size.
Deron’s Report Card:
Closed half of RTH short for a solid profit yesterday and took second half overnight. Stopped out for small losses in QQQ and SMH.
Closed Positions:
- RTH short – shorted 81.90 (average), covered HALF position 81.05, closed HALF with + 0.85
QQQ long – bought 23.05, stopped out 22.85, closed with (0.20)
SMH long – bought 23.74, stopped out 23.43, closed with (0.31)
Open Positions:
- RTH short – shorted 81.90 (average), stop on SECOND HALF lowered to 81.25, open with + 0.81
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