Commentary:
Yesterday was a great example of the importance of looking at multiple time frames when analyzing the market intraday. Because traders sometimes get so wrapped up in the short term intraday time frames of the market, they often miss the big picture of what is happening on a multi-day basis. If you were only looking at a 5-minute intraday chart of the Nasdaq or S&P yesterday, you may have thought that the market was really choppy and indecisive. However, a look at a multi-day 15-minute chart would show a completely different picture.
It the immediate-term trend of the market would have been down, we would have never gone long near the lows of the day as we did yesterday. However, when we re-entered our long positions yesterday afternoon per the intraday email updates, we were actually buying when prices came down to support over a three-day period. That support level we speak of was the lower channel of the uptrend on the that started on Tuesday. Although it is difficult to buy near the exact bottom, we bought QQQ and SMH yesterday near the lower channel support of the trendline on the 15-minute chart. Notice how looking at just a 5-minute intraday chart would have given us a bearish picture, but the 15-minute chart shows the opposite:
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Although the S&P and Dow were stronger than the Nasdaq yesterday, that is not a big deal considering the fact that the Nasdaq rallied several percent more than the S&P during Wednesday’s rally. The strength in the S&P yesterday was simply a matter of sector rotation as the S&P and Dow played “catch-up” with the Nasdaq. The strongest sectors yesterday included Oil Service (OIH — it’s about time for a rally!), Pharmaceuticals (PPH), and Retail (RTH), and Financials (XLF). The Biotechs and most of the technology-related sectors simply took a break. Considering that the SOX index rallied over seven percent on Wednesday, it was not surprising to see the SOX take a rest yesterday and consolidate to absorb the gains. The funny thing is that if you listened to the financial talking heads yesterday (bad idea), they would have you believing that the Nasdaq’s performance was horrible yesterday while the Dow really rocked. We of course realize the bigger picture of the past several days.
In our opinion, both the S&P and Nasdaq look pretty decent for more upside potential due to the price correction by time that occurred yesterday in all the major indices. Nevertheless, there are a few earnings warnings since yesterday’s close that could be potential drags on the market, especially the one from Philip Morris. The key level to watch today is the lower channel support of the trendline for the past three days, which can be clearly seen on a 15-minute chart. If we hold that level, the uptrend in the markets will probably continue. Otherwise, we need to use a bit of caution with new long positions. As such, we have raised our stops on all open long positions to just below the lower channel support of the uptrend line on the 15-minute charts.
Today’s watch list:
SWH – Software Index HOLDRS
Sector: Software
Long
Trigger = 22.25
Target = 23.55
Stop = 21.80
Notes = Just like the major market indices, the Software Index ($GSO.X) came down to support of the lower channel of the uptrend yesterday. Therefore, the risk of entering near yesterday’s close is low because we will quickly get out if the index breaks support of the trendline. Our trigger for entry is just above yesterday’s close, the target is the 20 day moving average, and the stop is just below the lower channel support of the trendline.
Since we already have three other open positions going into today, this will be the only additional play we are watching for entry today. If we get more than 3 or 4 open positions, it becomes increasingly challenging to manage the open positions. As always, make sure you read the report card below for updates to the stops and targets of open positions.
Deron’s Report Card:
Because we had an opportunity to sell into strength close to our initial profit targets, we closed both SMH and QQQ longs, but re-entered at a lower price later in the day when the Nasdaq retraced down to support. Those who are exclusively swing trading could have simply remained long the entire day and overnight last night. We chose to re-enter at a lower price to maximize profits and minimize risk. Either way you played it is fine. IWN also triggered and we are long (although we took profits on half of the shares near the high of the day).
For those who subscribe to the Intraday Updates, we also shorted BBH yesterday as it rallied into resistance of the upper channel of its trendline. We made over a point of profit on that trade, but only took a HALF share position size to minimize risk since we were still in an uptrend at the time.
Closed Positions:
-
SMH long – bought 20.20, sold 21.05 (average), closed with + 0.85
QQQ long – bought 21.41, sold 22.16 (average), closed with + 0.75
BBH short – shorted HALF position at 81.09, covered at 79.80, closed with + 0.65
IWM long – bought 73.42, sold HALF position at 74.00, closed with + 0.58
DIA short – (never triggered)
Open Positions:
-
QQQ long (re-entry) – bought 21.65, stop raised to 21.25, open with (0.05)
SMH long (re-entry) – bought 20.29, stop raised to 19.70, open with + 0.08
IWM long – bought 73.42, stop raised to 72.70, open with + 0.44
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