Friday’s trading action was uneventful as both the S&P (SPY)and Nasdaq (QQQ) traded sideways in a narrow range for most of the day, after a failed early-afternoon breakout attempt. This created little opportunity for low-risk trade entries because there was no clear direction the entire day. Did you notice the volatility during the last sixty minutes of trading, especially with the S&P? This was the result of traders closing options and futures positions on both sides of the market into the final hour of triple witching day. This is why we have a rule to stay out of the market during the late afternoon trading sessions of triple witching days, which occur on the third Friday at the end of each quarter.
The S&P futures is quickly approaching the support level of 832, which is the low of August 5, and could easily test that level today. We discussed this level last week as being a critical support level in the markets that will largely determine whether or not we test the annual low set on July 24. Because this is an important level that many traders will be watching, the support is likely to become a self-fulfilling prophecy that will cause the S&P to bounce off this level. Additionally, the S&P is starting to look a bit oversold on the daily chart and has drifted pretty far from the 20-day moving average, which acts as a leash, eventually pulling the market back closer to those levels.
The low of August 5 correlates with a price of 83.55 with SPY, so let’s keep an eye on that critical level. If that level fails to provide support, we could easily see a retest of July 24 lows within the next week or two. Just as important as 83.55 with SPY is the double bottom the Nasdaq-100 formed on Friday, creating a new support level around the 21.51 area with QQQ (867 – 869 on the Nasdaq futures).
While we are not very excited about being long OR short the market right now, we believe reward/risk ratio favors the long side of the market in the short term given the support levels we are coming down to, as well as the short-term oversold price action and narrow-range days. It’s possible that Friday’s choppy action was a reversal day, but we need to see a rally above Friday’s highs for confirmation, which would enable us to make some decent long plays in SPY and QQQ. But until we break Friday’s highs or August 5 lows, we don’t think there is a reason to be even mildly aggressive in the markets right now. Although SOH (sit on hands) days are boring, they are crucial in order to protect capital when trading conditions just plain stink!
Finally, we want to remind you of tomorrow’s FOMC meeting. Although there will probably not be any change in bias, many traders will probably be on the sidelines until the meeting is concluded. Therefore, we expect volume to be okay today, but light going into tomorrow’s session.
Today’s watch list:
QQQ – Nasdaq-100 Tracking Stock
Trigger = 22.03
Target = 23.09
Stop = 21.69
Notes = As discussed above, we are looking to buy on a break of Friday’s high, which also correlates with a break of the upper channel resistance of the downtrend from September 11. Our target is the gap from September 3, which also correlates with the upper channel resistance of the downtrend from August 22. Our stop is just below the 20-period moving average on the 60-minute chart.
We are aware there have been some changes regarding the use of ISLD and ETFs such as QQQ, and we will be discussing those changes in the next issue of The Wagner Weekly, which will be published later today.
SWH – Software Index HOLDRS
Trigger = 21.90
Target = 19.60
Stop = 22.58
Notes = The Software Index (GSO) formed a double bottom on the daily chart last Thursday and consolidated in an inside day on Friday. Therefore, if the index breaks below the lows of the prior two days, it will constitute a break of the double bottom that will also result in a new 52-week low. That is when we will look to enter.
Our stop on SWH is just above Friday’s consolidation (resistance at 22.50), which also represents a break of the 20-period MA on the 60-minute chart. Our target is a Fibonacci extrapolation of the most recent rally on the daily chart. However, we will adjust target as necessary once it triggers.
Deron’s Report Card:
Because of Friday’s sideways trading action, we only entered HALF position sizes of both SPY and QQQ when they hit our adjusted entry points. Entering half-share positions is a great way to “test the waters” on a setup that you like, but don’t want to get too aggressive with. If, and only if, the trade becomes profitable, you can add another half to the position with less risk because you are getting price confirmation. However, when you are wrong, as we were on Friday, the losses are minimal because you are only working with HALF of your normal position size.
SPY long – bought HALF position at 84.72, sold at 84.48, closed with (0.24) (average)
QQQ long – bought HALF position at 21.73, sold at 21.58, closed with (0.07) (average)
SMH 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