The major market indices gapped down below support on the daily charts yesterday and trended down for most of the morning session, enabling us to profit from a few short positions. Although there were not any major support levels in the vicinity, the selling slowed going into the afternoon session and formed a double bottom, prompting us to take profits on our short positions and watch for a possible reversal. Upon completing a bullish inverse head and shoulders pattern intraday, we entered a few long positions and rode them up as the market proceeded to fill the gap from the morning and set new intraday highs. After rallying directly into major resistance from the prior three days, we set tight trailing stops to lock in profits right before the S&P and Nasdaq were once again met by selling into the final thirty minutes of trading. Overall, it was a good trading day that enabled us to be profitable in all five of the trades we entered.
Perhaps the most important event that occurred yesterday is that the S&P index broke below the neckline of the head and shoulders pattern on the daily chart we were discussing last week. As such, the predicted move is eventually a 90-point drop in the futures, down to about the 790 level. That being said, head and shoulders patterns on a daily chart rarely follow-through in a smooth trending manner. For example, even though we broke the major support level of the neckline yesterday, the markets still attempted to recover in the afternoon session before eventually closing near the lows. This type of indecisive trading action requires you to be alert and ready to shift your directional bias at a moment’s notice. Also, volume has been picking up for the past two days which suggests the selling momentum is increasing. A spike in volume will usually mark a short-term bottom.
Although the primary purpose of The Wagner Daily is to seek out low-risk, multi-day ETF swing trades, we sometimes must adapt our style to that of the current market environment. As evidenced by the past few days, we are not presently in a market environment that is conducive to multi-day swing trades because of the lack of follow-through we are seeing in any trades with a duration of more than a few hours. This is largely the result of all the international political variables the U.S. is facing, not to mention the start of earnings warning season (with another bomb dropped by EDS after the close yesterday). Therefore, we have been primarily making intraday trades during the past week because overnight exposure results in increased risk. Once we see more closure on the Iraq issue (which apparently did not occur when Iraq agreed to admit weapons inspectors), it should result in a smoother trend eventually becoming established, which will allow us to begin taking more overnight trades. Until then, we need to adapt to current market conditions by taking what the market gives us. Five winning trades that each net 30 cents of profit is still the equivalent of one winning trade that nets 1.5 points (except a bit more commission).
Today’s watch list:
SPY – SPYDERS (S&P 500 Index tracking stock)
Trigger = HALF position at 86.18, HALF position at 85.90
Target = 83.60
Stop = 87.05
Notes = Given the weak close yesterday, as well as the pre-market weakness in the futures, odds are decent that SPY will break yesterday’s low. If yesterday’s low is broken, there is not much support on the daily chart until the low of August 5, around 83.50. We will short half position just below yesterday’s low and another half below the whole number at 85.90. Our stop is just above yesterday’s close, but we may tighten it if market conditions warrant. Remember the gap rule — we don’t short a gap down that triggers on the open without waiting for confirmation of the break of 20-minute lows.
MDY – S&P MidCap SPDR ETF
Trigger = 76.90
Target = 74.50
Stop = 77.80
Notes = Similar play to shorting the SPY. If we break yesterday’s low, next support (target) is the low of August 5 at 74.40. Stop is just above yesterday’s close. Standard gap down rule applies.
Deron’s Report Card:
We netted roughly 30 cents profit on each of the four intraday trades we entered yesterday, as well as with the SMH overnight short that we covered. Through the use of trailing stops, we were able to lock in profits at the most ideal levels with each of the trades we entered. We went to all cash overnight.
SMH short (from overnight) – shorted 21.82, covered 21.48, closed with + 0.34
SPY short – shorted 86.95, covered half at 86.43, half at 86.88, closed with + 0.34 (average)
DIA short – shorted 81.44, covered half at 80.89, half at 81.37, closed with + 0.31 (average)
QQQ long – bought 22.03, sold half at 22.33, half at 22.45, closed with + 0.36
SMH long – bought 21.27, sold half at 21.53, half at 21.68, closed with + 0.33
BBH long – (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