Yesterday began with an opening gap down that subsequently saw the S&P sell off down to support of the 20 period moving average on the 15 minute chart within the first 45 minutes of trading. If you were only looking at a one-day intraday chart of the morning session, it would appear as if the market was going to be in a downtrend for the remainder of the day. However, a look back several days showed that the morning selloff was simply the result of a normal retracement off a parabolic rally the previous day. That is why we felt confident staying with our long swing trades in the morning, despite the intraday weakness. In fact, since the 20 MA was serving as the lower channel support of the trendline, the morning lows even represented a low-risk entry point for any intraday long trades.
The 20 MA acted as support for the S&P futures (and SPY) for the remainder of the morning session, enabling the market to come very close to testing its highs of the previous day by 1 pm. Upon the rally into the highs of the day, we took profits on half of the remaining shares of our four long swing trades due to approaching resistance of the previous day’s highs. Selling half of our shares into the 1:00 pm rally worked out great because that rally also ended up being the market’s high for the rest of the day.
By 1:30 pm, SPY broke below support of the 20 period MA on the 15 minute chart, which sparked a rather sharp selloff for the remainder of the day. By 2:30 pm, the market was approaching its lows of the day and appeared poised to break support of the lower channel of its uptrend line. In addition, there was a head and shoulders setting up on the 5 minute intraday chart. These factors prompted us to take profits on the remaining shares of our swing trades, even though they had not yet hit their stops (with the exception of QQQ). Although we had expectations of being able to ride our swing trades out for more than two days, we had to take what the market gave us, which wasn’t a whole lot yesterday afternoon. The 15 minute chart below shows where the 20 period moving average acted as support in the morning and also shows where the break of the 20 MA, and especially the 40 MA, started the afternoon selloff:
We don’t have much of an opinion on what to expect going into today because the market is now in “no-man’s land” after having broken support of the uptrend, but also having a good deal of support directly underneath current prices from the lows of September 30 and October 1. We also noticed there is an inverse (bullish) head and shoulders pattern setting up on SPY. The left shoulder was formed on September 23 and 24, the head was formed with the lows of September 30, and the right shoulder started to form yesterday. Confirmation of the follow-through would be a break of $86 (the highs of September 24). However, it may take a few days to rally back up to the neckline (if it does at all).
Today’s watch list:
SMH – Semiconductor Index HOLDRS
Trigger = 20.85
Target = 22.10
Stop = 20.19
Notes = Although the market sold off pretty hard yesterday afternoon, the SOX index remained one of the strongest sectors relative to the Nasdaq. Notice how SMH closed near the highs of October 1, while the Nasdaq and S&P closed much lower. If SMH gets back above its 20 MA, the uptrend will probably continue in the index. The target is the 200 MA on the 60 minute chart. The stop is just below yesterday’s closing lows.
Deron’s Report Card:
We closed all our swing trades yesterday. As you know, we sold half of our initial shares on October 1, one fourth of intitial shares yesterday around 12:41 pm, and the final one fourth of initial shares into the selloff yesterday afternoon. Legging out of positions is a good way to lock in profits, but not get out too soon if the trade continues in your favor. That is why we often use trailing stops. Since we got out of our positions in three different increments, we have averaged our sell prices together and listed them below.
“Swing” trades (per The Wagner Daily)
DIA long – bought 78.10 (on Oct. 1), sold 79.22 (avg. price), closed with + 1.12
SPY long – bought 83.75 (on Oct. 1), sold 84.82 (avg. price), closed with + 1.07
SMH long – bought 19.97 (on Oct. 1), sold 20.56 (avg. price), closed with + 0.59
QQQ long – bought 21.18 (on Oct. 1), sold 21.57 (avg. price), closed with + 0.39
Intraday trades (per Intraday Updates E-mail Service)
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