Commentary:
After an opening gap up into resistance, and choppy trading action in the morning, the market finally broke major resistance in the early afternoon that enabled a steady uptrend for the remainder of the day. Notice how the Nasdaq (QQQ) rallied sharply after breaking the upper channel resistance of the downtrend line from September 11, which was also the 20 period MA on the sixty minute chart:
As we anticipated, the Nasdaq showed more relative strength than the S&P yesterday, led by strength in the Semiconductor (SOX) Index, which closed up over 7 percent. This enabled us to realize some nice gains on both our QQQ and SMH swing trades from overnight. Like we discussed in Wednesday morning’s report, the relative strength of the SOX that we saw during the choppy trading on Tuesday was an early indicator of a probable rally in that sector yesterday. Therefore, always pay attention to which sectors are showing relative strength or weakness during the day because it often gives you clues as to which sectors will be tradeable during subsequent days. More importantly, always pay attention to volume, which has been decent for the past couple of days.
Going into today, we expect flat to slightly positive trading action. Because the Nasdaq had such a big run-up yesterday, it would not be unusual for today to serve as a consolidation day, which is also known as a correction by time. Prices always correct in one of two ways. A correction by time occurs when an index trades sideways after a big rally, enabling moving average and trendline support levels to catch up to the price of the index. On the other hand, a correction by price simply means that the index retraces or pulls back from its highs before subsequently setting a new high. Although many traders and investors are probably hoping for another rally day today, it would actually be healthier for the market to simply trade sideways near yesterday’s highs, allowing it to digest yesterday’s gains. By doing so, this base would serve as a more solid support level once the market attempts to make another leg up. Although the Nasdaq has broken the first resistance channel, as labeled in the chart above, the next resistance level of the upper channel of the downtrend from August 22 is even more significant because it is of a longer duration. This also correlates with the lows of September 16 and 17. The next resistance level is a good place to take profits on your QQQ and SMH long swing trades. Take a look:
Let’s trail a stop on our long swing trades today and be somewhat conservative entering new trades until we see if the market is going to trend another day or take a break first. The action of the first sixty minutes of trading will give us a good idea as to what to expect for the rest of the day.
Today’s watch list:
IWM – Russell 2000 Index Fund (iShares)
Sector: n/a
Long
Trigger = 72.90
Target = 75.20
Stop = 71.75
Notes = Although IWM initially started out lagging the Nasdaq, it showed great relative strength and strong volume into the close. Since the next major resistance level is a few points away, we feel this trade offers a good reward/risk ratio for a long entry. IWM is likely to run into a bit of resistance around the 73.50 area because that level is the upper channel resistance of the downtrend from September 11. However, our entry price is low enough to allow us a profit buffer at that point. Remember the opening gap rules this morning (wait for a break of the 20-minute high before buying if it gaps above our trigger price on the open).
The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. The Russell 3000 Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market.
DIA – DIAMONDS (Dow Jones Industrial Average Tracking Stock)
Sector: n/a
Short
Trigger = 77.75
Target = 76.65
Stop = 78.30
Notes = Although the Nasdaq was strong yesterday, there was relative weakness in both the S&P and the Dow, especially the Dow. Unlike QQQ and SPY, DIA was one of the few indexes that was unable to close above the highs of September 23. Therefore, if there is any weakness in the market today, the Dow will probably be one of the first indexes to show weakness, especially if it breaks support at 78. This would also constitute the making of a failed inverse head and shoulders, which would also be bearish. However, if the market consolidates or trends higher today, this short will probably not trigger, which is also fine.
Deron’s Report Card:
Although we sold our longs for basically break even when the market lost support and broke its intraday lows around 11 a.m. in the morning, we re-entered when the market reversed and consolidated near the highs. We then rode out the rally and took profits on half of the shares into the close and took the other half overnight. For simplicity sake, we have averaged our entry and exit prices for SMH and QQQ below:
Closed Positions:
-
SMH long (re-entry) – bought 20.20, sold HALF 20.88, closed with + 0.68
QQQ long (re-entry) – bought 21.41, sold HALF 21.84, closed with + 0.43
SMH long (initial entry) – bought 19.78 (average), sold 19.92 (average), closed with + 0.14
QQQ long (initial entry)- bought 21.22 (average), sold 21.21 (average), closed with (0.01)
Open Positions:
- SMH long (re-entry) – bought 20.20, stop raised to 20.10, open with + 0.54
QQQ long (re-entry) – bought 21.41, stop raised to 21.30, open with + 0.46
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