Last week was filled with an abundance of indecision combined with a lack of commitment, as evidenced by all the gaps and narrow range days we experienced. The anticipatory rally going into September 11 turned out to be nothing but smoke and mirrors, which often happens when there is no precedence of history for a particular trading day — nobody really knew what to expect the market to do on the 11th. After getting smacked pretty hard on Wednesday and Thursday, the markets rallied and attempted to form a reversal day on Friday. If you remove all the volatility, last week’s major indices basically closed the week where the started.
The Nasdaq started out with more relative strength than the S&P on Friday, with Software, Semis, and Hardware stocks all leading the way immediately after the market opened. However, going into the afternoon session, the balance of power shifted as the Nasdaq weakened and the S&P gained momentum. Both major indices were choppy on Friday, but closed near their intraday highs. A close at the previous day’s high usually leads to follow-through the next morning, but we don’t feel very confident it will happen because there is so much resistance at current price levels on the daily charts. None of the daily charts we researched this weekend are looking very tradeable. More importantly, the S&P is still setting up a bearish head and shoulders on the daily chart. Since the predicted move of a head and shoulders pattern is equivalent to the distance from the top of the head to the neckline, the S&P would probably test its 52-week low if it breaks the neckline. Take a look:
We should gradually see volume begin to return to the markets this week with the passing of September 11 and people returning back from their summer vacations. Beware, however, that the issue over how to deal with Iraq is still a black cloud over the markets. In our opinion, we don’t think anything will happen in Iraq in the near future, but even if that is the case, bear in mind the markets will be very susceptible to rumors and news bytes from the media. Just be alert and conservative with your overnight position sizes until we get a little more clarity on that issue. Other than that, trading should begin to take on a “business as usual” approach as Summer draws to a close.
Today’s watch list:
OIH – Oil Service Index HOLDRS ETF
Sector: Oil Service
Trigger = 52.20
Target = 54.19
Stop = 51.27
Notes = Although our trade setups are always based on technical analysis, occasionally there is an opportunity to use fundamental analysis to confirm our technical setup. In the case of OIH, we feel that the current fear over a war with Iraq could lead to rising oil prices, which would push the oil drillers higher.
By setting our trigger price above resistance on the 60-minute chart (above), we are forcing our fundamental trade idea to confirm itself through technical analysis. If OIH gets above the gap down from September 3, it will be above its 20-period moving average on the 60-minute chart and will also be above the upper channel of its downtrend from September 11. Our stop is the 200 MA on the 60-minute chart. Our first target is the high of September 11, but we may raise our target if OIH breaks through that level convincingly.
PPH – Pharmaceutical Index SPDR ETF
Trigger = 71.80 HALF position only; will add another HALF below 71.20
Target = 68.85
Stop = 72.80
Notes = Even though we got stopped out of PPH on Friday, we still like this short setup on the daily chart if it gets below last Thursday’s low. We will short a HALF position below last Thursday’s low and short another HALF below Friday’s low.
Occasionally we enter a trade a day or two early, but when our re-entry prices trigger, it usually results in a much more profitable trade because more people are trapped on the wrong side. Notice how there is not much price or moving average support below Friday’s low. Our target is the high of the gap from July 29. Our stop is Friday’s high. Be aware that PPH is one of the more volatile ETFs we trade, so adjust your position size accordingly. Even one or two hundred shares can be profitable on a several point move.
Deron’s Report Card:
Our trailing stop on RTH enabled us to lock in profits on the second half of our overnight position before the sector reversed on positive consumer spending numbers. PPH triggered by only a few pennies and quickly reversed, stopping us out. XLF short did not trigger.
- RTH short – shorted 81.90 (average), trailing stop hit on second HALF of position at 81.00, closed with + 0.90
PPH short – shorted 71.39, stopped out 72.45, closed with (1.06)
XLF short – (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