Commentary:
As you have probably already heard, the big news going into today is that Iraq has agreed to allow U.N. weapons inspectors to re-enter the country without any conditions. This will likely be interpreted as very positive news for the market because, as we discussed yesterday, many traders and investors have been waiting on the sidelines for some resolution with Iraq. Odds are good that this should lead to finally seeing an increase in volume of the major market indices, which the markets desperately need. In fact, volume was so light yesterday that the Nasdaq barely traded more shares than it did on the shortened trading day of September 11.
The key today is whether or not this pre-market gap-up in the futures holds throughout the entire day. A majority of gaps greater than 2% of the previous day’s close statistically do NOT get filled, but we need to see confirmation before entering any new long positions. This is where our gap rule comes into effect. Remember that we will NOT be entering any new long positions that immediately hit their trigger prices on the open until they break the high of their first twenty minutes of trading. By waiting for a position to trade to a new high after the first twenty minutes, we are putting the odds of a profitable trade in our favor by reducing the probability of buying at the high of the day if the gap fails.
If the S&P and Nasdaq are able to set a new high after the first twenty minutes of trading, odds are good that we will have a trending day that will enable us to take some long positions. However, if the markets do not have enough momentum to set a new high because of the large gap, it could result a day where the markets go sideways. When that happens, it is often difficult to profit from any solid trades unless you were already long from the night before. Either way, the main positive here is that, as mentioned before, last night’s Iraq news will likely be the impetus for volume to start returning to the market, making every trading day more profitable.
Today’s watch list:
BBH – Biotech HOLDRS ETF
Sector: Biotechnology
Long
Trigger = 82.07
Target = 84.52
Stop = 80.65
Notes = The Biotech index (BTK) has been consolidating nicely between 80 and 82 for the past two weeks. Today’s gap will probably push the index above its resistance of 82, which would also cause a break of the upper channel of the downtrend from August 22. We will be looking to buy on a break of the 82 resistance level, but remember the gap rules in the event that BBH gaps beyond our trigger price. Stop is just below yesterday’s close. Target is the 200 period moving average on the 60-minute chart. Since this can be a volatile ETF, remember to adjust your position size accordingly.
QQQ – Nasdaq 100 Tracking Stock ETF
Sector: n/a
Long
Trigger = 23.15
Target = 23.75
Stop = 22.90
Notes = We will be looking to take QQQ long once it trades above the gap down from September 3. Our target is the 200 period MA on the 60 minute chart, which also correlates with the upper channel of the downtrend from August 22. Our stop is just below the whole number support.
SMH – Semiconductor HOLDRS ETF
Sector: Semiconductor
Short
Trigger = 21.82
Target = 19.20
Stop = 22.25
Notes = Although there is a good chance this will not trigger today due to the large gap in the futures, the sector has been incredibly weak during the past week and closed at a new 52-week low yesterday after testing the low of 22 three times within the past month. Therefore, if today’s gap fails and there is further weakness in the market, this will probably be one of the first sectors to show relative weakness. We will look to go short on a break of yesterday’s low. The target is a Fibonacci extrapolation of the last significant rally. Great reward/risk ratio on this one if it triggers.
Deron’s Report Card:
.
Although the surprise Iraq news is positive for the broad market, it will probably NOT be interpreted as positive for oil stocks, which we went long largely in anticipation of continuing tension in the Middle East, as well as based on technical indicators for support and resistance. Since Iraq is now cooperating with the U.N., the price of oil will probably drop today and take oil-related stocks lower as well. Therefore, we are probably going to be stopped out of our OIH long position as soon as the market opens. Rather than taking the stop immediately at the open, we will be using the opening 5-minute low as our stop. Even if oil stocks gap down, we will probably see a bounce on the open due to broad market strength. We will then use this bounce to cut the loss in OIH. If, however, there is no bounce within the first 5 minutes of trading, we will simply cut the loss at market.
Yesterday’s trade in PPH was a good example of how entering positions with HALF share size can be a low-risk way to “test the waters” on a trade. When PPH broke Thursday’s low, that indicated a significant break of support, which is why we shorted a HALF position at 71.80. However, we did not want to get too aggressive until PPH broke Friday’s low of 71.25, which is why our trigger entry for the second half was at 71.20. PPH remained weak through much of the morning session, but gained strength into the final hour of trading as the rally in the S&P pushed most sectors higher. PPH subsequently hit our stop into the final thirty minutes of trading, but our loss, based on an average position size, was only a little more than 50 cents because we only had a HALF position when we got stopped out for 1.14 points.
Closed Positions:
-
PPH short – shorted HALF position 71.71, stopped out HALF position 72.85, closed with (0.57) due to HALF position size
Open Positions:
- OIH long – bought 52.30, stop is a break of the opening 5-minute low or 51.80, whichever is lower, open with + 0.04
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