Commentary:
Going into the first reversal period yesterday morning, the S&P attempted to fill the gap down from the open, but failed because it was unable to break the high of the day with conviction. The S&P subsequently sold off quickly down to the lows of August 5, and even traded below that level intraday. However, because the move occurred so fast, it left little opportunity for trading after about 10:30 am. Rather than downtrending for the rest of the day, what occurred was a sharp selloff in the morning and then sideways action for the remainder of the day. The Nasdaq showed a bit more relative weakness than the S&P and set new intraday lows around 2:45 pm, even though the S&P held the morning lows. Note the bounce and close above the low of August 5:
The rally that occurred during the final thirty minutes of trading was not surprising given the oversold conditions the market has been experiencing. If the rally held, the S&P would have closed at the high of the day and formed a bullish hammer candlestick pattern. However, selling hit both the S&P and Nasdaq during the final minutes of trading, which reduced the odds for upside follow-through on the open today.
With the gap down we are seeing pre-market, you will want to keep an eye on the 832 level of the S&P futures. This represents the low of August 5 and will serve as overhead resistance if we open below that level. Beyond 832, yesterday’s high and Friday’s low around 838 will both serve as resistance. If the S&P can get beyond 838, there is decent chance of a sustainable rally. However, below yesterday’s low of 824.50, the next support is not until 820 (minor support) and then around 814. Since the Nasdaq broke to new 6-year lows yesterday, it’s difficult to predict where support will be found on that index.
Remember the FOMC meeting today, which will provide the markets with a decision on any changes to the discount rate at 2:15 pm EST. Virtually everyone is expecting no change in rates, but people will indeed be watching to see if there is a change in bias moving forward. Keep in mind that what matters more than the actual decision on rates is the market’s REACTION to the decision. The actual decision is irrelevant in the short-term, but the market’s reaction is the key factor to watch. Most FOMC meeting days are marked by small rallies leading up to 2:15 pm and then volatile and extremely whippy conditions after the announcement. Therefore, it is not wise to remain in day trades beyond 2:15 pm because you will probably get stopped out on both sides of the market unless you are swing trading with looser stops (also not recommended right now). Finally, here is a Consumer Confidence report being released at 10 am today, so beware of volatility.
Today’s watch list:
We have a few short setups in mind today, but are not confident of our entry prices yet because we want to see how this gap down in the market plays out today, especially given the FOMC meeting coming up. For those who subscribe to our Intraday Updates, we will email you any new plays we enter after the open. Otherwise, sit tight on the short side and be patient.
OIH – Oil Service Index HOLDRS
Sector: n/a
Long
Trigger = 49.32
Target = 51.50
Stop = 48.30
Notes = When crude oil spiked to new highs yesterday, we began watching the Oil Service (OSX) index for a rally. Given the pressure on the broad market, it was difficult for OIH to rally much, but it did show signs of life and even closed slightly positive on the day, despite market weakness. Therefore, we expect OIH to be strong today if there is any market strength at all. We will be looking to buy above yesterday’s high with a stop just below yesterday’s low. We will update our target depending on market conditions, but our initial target is the low of the gap down from September 17.
Deron’s Report Card:
SWH triggered after the reversal period, but we took profits when the S&P attempted to break the morning high and fill the gap. We then tested the waters by buying a HALF position of SMH when the market attempted its afternoon reversal, but we were stopped out with a small loss. Again, the ability to keep losses small is the great thing about taking smaller position sizes on speculative trades.
Closed Positions:
-
SWH short – shorted 21.71, covered 21.66, closed with + 0.05
SMH long – bought HALF position 19.43, sold HALF position 19.05, closed with (0.19) (average)
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