Commentary:
The market action yesterday was typical of a Fed day and consisted of a pre-FOMC announcement rally, immediate selloff, recovery and choppiness for the rest of the session. However, we did notice some important divergence among the Semiconductors and Biotechs, both of which showed relative strength to the S&P and Nasdaq and closed positive on the day. Of particular importance was the strength in the SOX index because the Semiconductors tend to lead the Nasdaq because of how heavily weighted the sector is. Unfortunately, the S&P was much weaker than the Nasdaq and sold off into the close, which prevented the SOX from closing near its highs. It seems that traders don’t want to buy right now because there is no solid reason to do so, but the bears are taking a break because the markets are a bit oversold. This is what causes the tight trading ranges and choppiness we have seen for the past several days. Most of the moves, both up and down, have simply been the result of opening gaps, not trending days.
Yesterday could be considered a reversal day in the SOX index because the sector gapped down on the open, filled the gap, consolidated in the upper third of its range and rallied to break above Monday’s high, but closed in the middle of its range due to market weakness. More importantly, this all occurred on higher than average volume, which is our leading indicator. Because the reversal action occurred at the bottom of a multi-week selloff, it is probable that we will see more upside follow-through in the SOX during the next several days. While it is too early to determine if the downtrend will be broken, we expect a rally to at least the upper channel resistance of the downtrend from August 22. For SMH (the Semiconductor ETF that we are currently long), this equates to a price target of just over 21.50, which is also a 0.382 Fibonacci retracement. If this occurs, we would also expect QQQ to follow along, which is why we also took a long position in that index as well. However, we first need to break above yesterday’s high in SMH, which would break the resistance of the downtrend from September 11. We have labeled these levels on the daily chart of SMH below:
As of early Wednesday morning, chip stocks are up strong in Europe, so that should give us an indication of what to expect when our market opens. RFMD and ASML both reported solid earnings yesterday, which should also aid the rally. The only negative in the sector was Micron’s report, but we believe it is already factored into the price of the stock. We are positioned well with our SMH long play from overnight.
We still need to be cautious going into today because the market has not yet confirmed any type of reversal, although there were important signs that could indicate a rally day today. Confirmation would occur once the Nasdaq futures break the upper channel resistance of the downtrend from September 11, which equates to the 20 period moving average on the 60-minute chart. This level, which is presently around 858 has served as resistance for the past nine days, so a rally above it would likely stimulate short covering and new buyers. Even more confirmation would be a break of yesterday’s high of 866. Most importantly, watch the volume because we want the volume to confirm the price by increasing on a break of resistance. On the downside, yesterday’s lows are important support levels, especially for the S&P because of the relative weakness it was showing yesterday. The low in the S&P futures was 815.50.
Today’s watch list:
QQQ – Nasdaq-100 Tracking Stock
Sector: n/a
Long
Trigger = 21.35
Target = 22.40
Stop = 20.80
Notes = Even though we are already long QQQ from overnight, this trade will be added to the existing long position if it triggers, but will be treated as a separate trade because of different stop and target prices. As mentioned above, we are looking to buy on a break above the 20 MA on the 60-minute chart. Target is the upper channel of the downtrend from August 22. Stop is below yesterday’s support.
SMH – Semiconductor Index HOLDRS
Sector: Semiconductor
Long
Trigger = 19.90
Target = 21.50
Stop = 19.15
Notes = Even though we are already long SMH from overnight, this trade will be added to the existing long position if it triggers, but will be treated as a separate trade because of different stop and target prices. Reasons we like the trade are described in detail in the commentary above. Our trigger price is a break above the 20-ma on the 60-minute chart. Target is the upper channel of the downtrend from August 22. Stop is below yesterday’s support.
Deron’s Report Card:
Yesterday we entered full positions of QQQ and SMH at two separate entry points (per the intraday email alerts). We sold 50% of our position size before the FOMC meeting to reduce risk, but kept the rest for swing trades. OIH did not trigger.
Closed Positions:
- SMH long – bought 19.58 (average), sold 19.53, closed with (0.05)
QQQ long – bought 21.22 (average), sold 21.13, closed with (0.09)
OIH long – (never triggered. . .which is odd considering the strength in oil prices)
Open Positions:
- QQQ long – bought 21.22 (average), stop raised to 20.80, target 22.40, open with (0.19)
SMH long – bought 19.58 (average), stop raised to 19.15, target 21.50, open with (0.20)
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