Yesterday started out in typical choppy fashion, bouncing between the intraday highs and lows for the first two hours of trading. At around 10:30 am, the S&P dropped below its 20 period MA on the 15-minute chart, which prompted us to initiate a short position in SPY. However, SPY quickly reversed and traded back up into the middle of the range, stopping us out for a small loss. During the same time period, the Nasdaq actually sold off all the way down to and dropped below the low of September 30. However, the quick recovery back above the 20 MA in the S&P indicated to us there was some buying interest in the markets. It was as if the market did not want to go any lower, despite the technical weakness. This prompted us to go to cash and watch carefully for any signs of a breakout.
Going into the lunchtime doldrums, we noticed bullish ascending triangle patterns forming on both the S&P and the Dow, which prompted us to set a buy stop order on DIA in the event it broke the highs of the prior two days. We have outlined the ascending triangle pattern we were looking at in the early morning. Notice how the rally took off upon breaking out of the triangle pattern:
The price target for a rally upon breaking out of a bullish ascending triangle is typically equal to the distance from the top of the triangle to the bottom. In the case of SPY (above), the predicted rally was just under 3 points. Notice how the prices rallied almost exactly three points beyond the triangle upon breaking out.
There were two interesting things we began noticing during the past several days that indicated to us that a short-term bottom was probably near.
The first indicator was volume, which usually precedes price. Through paying attention to volume, we noticed that the heavier volume days were occurring on up days, while most of the lighter volume days were sideways to down. Second, we noticed that even though the market kept gapping down or selling off in the mornings, there was not much selling momentum to push prices lower throughout the day. Both of these signals indicated to us that the sellers were starting to dry up, thereby enabling the market to rally on the slightest bit of buying interest. In other words, the bears were getting worn out. While this may not be a tangible technical indicator, it is definitely an observation that you do not want to ignore because those two signals typically precede a big rally. While many traders were viewing the weakness of the past week as short-term breaks of support, a look further back to the end of July indicated that rather than breaking support, the market was actually basing on support that was already established. The markets have been creating a new support base through the double bottom that was put in during the past few days in all the major market indices. This resulted in many shorts getting trapped at the lows when the markets rallied above the highs of September 30 yesterday.
Given the signals discussed above, we were not surprised to see the big rally that occurred yesterday in both SPY and DIA, both of which really gained momentum after breaking the highs of September 30. The rally in SPY and DIA was even more important than the one we saw on September 25 and 26 because today’s closing prices put them both above the upper channel resistance of the downtrends on their respective daily charts, whereas last week’s rally fizzled out when prices rallied into that same trendline resistance. The Nasdaq also had a strong rally, but has been lagging the S&P during the past several days. As such, QQQ has not yet broken the upper channel resistance of the trendline, but is very close to doing so. Going into the coming days, any rally above yesterday’s highs will break the downtrend. Below are daily charts of four of the major ETFs we trade on a regular basis: SPY, DIA, QQQ, and SMH:
Although the daily charts are looking great for most of the major market indices, it is not yet safe to say the bear market has ended because resistance has not yet been broken on the longer term weekly charts. Remember that the longer the time horizon, the more significant the chart pattern becomes. Therefore, let’s keep a close eye on the weekly charts, especially QQQ which is close to breaking the weekly resistance. When these resistance levels start getting broken on the weekly charts of the major indices, we could really start to see some major buying. Until then, we will continue to be cautiously long unless SPY or DIA breaks back down below the resistance levels that were just broken. These trendlines are good buy stops to go long (such as with QQQ and SMH) and are also a logical place for stop losses once the index breaks the trendline. Keep in mind that when an index or stock breaks resistance, that same price level becomes the new support and a good place to set stop losses for long positions.
After the big rally we saw yesterday, we would not be surprised to see the market take a bit of a break today and consolidate before going higher. However, if new highs are established within the first hour of trading, the momentum could continue and enable another trending day today. There was positive news from DELL after the close yesterday, so that should help in solidifying yesterday’s gains. One thing is for certain. . .it sure felt good to finally be able to get a bit aggressive after being patient and stalking the market for so long. Let’s see if this pig can fly!
Today’s watch list:
Since we are currently in four swing trades from overnight, there are no additional swing trades we are looking to enter today. By managing more than four swing trades at any given time, we lose efficiency. Instead of entering new trades, we will focus on managing our existing trades for maximum profits.
If you did not enter any of yesterday’s swing trades with us, you could still enter today and use the same stop prices, but realize there is a higher degree of risk in doing so because it is the second day of the rally. Each successive day of a rally always brings increased risk with new long entries.
Deron’s Report Card:
“Swing” trades (per The Wagner Daily)
DIA long – bought 78.10 (on Oct. 1), stop at 77.30, no specific target yet; will trail a stop
SPY long – bought 83.75 (on Oct. 1), stop at 82.65, no specific target yet; will trail a stop
SMH long – bought 19.97 (on Oct. 1), stop at 19.60, no specific target yet; will trail a stop
QQQ long – bought 21.18 (on Oct. 1), stop at 20.90, no specific target yet; will trail a stop
To lock in profits and reduce risk, we sold HALF the original share size of each of the above swing trades yesterday, but are still long the remaining HALF shares overnight. Here are the sell prices and profits for each of the above swing trades:
DIA long – sold HALF at 79.22, closed with + 1.12
SPY long – sold HALF at 84.86, closed with + 1.11
SMH long – sold HALF at 20.34, closed with + 0.37
QQQ long – sold HALF at 21.55, closed with + 0.37
Intraday trades (per Intraday Updates E-mail Service)
DIA long – bought 77.09, sold 78.17 (avg. price), closed with + 1.08
SPY short – shorted 81.60, covered 82.14, closed with (0.54)
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