Commentary:
Yesterday was the choppiest trading day we have seen in quite some time. With the exception of the final hour into the close, there was a lot of indecision that resulted in challenging intraday trading conditions. The S&P began by consolidating at the morning lows (which usually leads to lower prices), breaking out and rallying to a new high, quickly selling off hard to set a new intraday low, rallying nearly 50% back to the middle of the range, and finally trending down for the final hour, closing at the intraday lows. In hindsight, it definitely was a SOH (sit on hands) day, although we tested the waters with a few intraday trades. If you were not able to profit from the steep selloff yesterday, don’t beat yourself up too bad because it was the kind of day that made it difficult to stay short, even though the market got whacked.
The main observation we had from yesterday is that even though the S&P and Nasdaq sold off and broke support yesterday, there did not seem to be the kind of panic selling that usually comes from big moves such as what we saw. It appeared that many traders were trying to buy the dips as others were selling into strength, which is what caused the choppiness. It also seemed to us that the Nasdaq held up much better than the S&P, especially during the final hour. In fact, the Semiconductor index, which attempted to break out earlier in the day, set a double bottom into the last sixty minutes of trading, even as the S&P kept setting new lows. We have learned it is important to pay attention to these subtle observations because they often hint at what to expect the next day. Given the relative strength we saw into the close, we would not be surprised to see strength in the Nasdaq today, and especially the SOX index, which usually leads the Nasdaq. It appeared to us that the sellers have dried up in the Nasdaq, at least for now.
Going into today, we expect to see a relief rally in the major market indices. Assuming the relative strength yesterday follows-through today, the Nasdaq will probably be stronger than the S&P. After the close yesterday, Qualcomm released positive comments regarding record chip demand for their cell phones. Since QCOM is a big component of the Nasdaq-100 Index, it will probably spark a tech rally, which should last at least one day. In particular, keep an eye on technology-related ETFs such as SMH, SWH, WMH, and of course, QQQ.
WMH (Wireless Index HOLDRS) is too illiquid for intraday trading, but is fine for multi-day swing trading if you so desire. Remember that even a low-volume ETF cannot be manipulated very easily because it will always follow the exact price of the underlying equities. If anyone would attempt to manipulate the price, arbitrage traders would quickly keep the price in sync with the components. This is one of the things we love about trading ETFs.
Finally, be aware that today is a Triple Witching Day. This is always the third Friday of March, June, September, and December, when option and futures contracts expire on market indexes used by program traders. The simultaneous expirations often set off heavy trading of options, futures and the underlying stocks during the final hour of the trading session. This typically results in unpredictable and volatile moves in the major market indices during the last sixty minutes of trading. It is usually a good idea to be out of the market by no later than 3:00 pm on a Triple Witching Day.
Today’s watch list:
SMH – Semiconductor Index HOLDRS
Sector: Semiconductor
Long
Trigger = 21.08
Target = 22.40
Stop = 20.55
Notes = As discussed in the commentary above, we expect to see strength in the Semis today. We are buying on a break of the upper channel resistance of the downtrend from September 11, as shown in the 60-minute chart above. Our stop is just below yesterday’s low. Target is a 0.382 Fibo retracement off the selloff from the 11th, which also correlates with the 200 period MA on the 15-minute chart.
QQQ – Nasdaq-100 Tracking Stock
Sector: n/a
Long
Trigger = 22.20
Target = 22.93
Stop = 21.78
Notes = Just like with SMH, we are buying on a break of the upper channel resistance of the downtrend from September 11. Our stop is below yesterday morning’s support level and the low of September 18.
Deron’s Report Card:
SPY and MDY did not trigger on the open due to our opening gap rules. We later entered SPY with an adjusted trigger price (per intraday update email) and made a small profit on it. Although MDY did trade a nickel below our trigger price around 9:55 am, it was on the third market (Nasdaq) at the time that NYSE and AMEX were both bidding higher than our trigger price. Therefore, we did not take the MDY trade until it triggered later in the afternoon, per our initial trigger price.
We attempted to short PPH twice yesterday because the Drug sector was weak, but the choppiness of the market shook us out of the trade before it eventually resolved lower.
Closed Positions:
-
MDY short – shorted 76.90, covered 76.32 (average), closed with + 0.58
SPY short – shorted 85.79, covered half 85.23, covered half 85.48, closed with + 0.43 (average)
PPH short (first entry) – shorted 70.25, covered 70.25, closed with +0.00
PPH short (re-entry) – shorted 69.99, covered 70.27, closed with (0.28)
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