Commentary:
Well,
so much for the follow-through of the bullish inverse head and shoulders pattern
we discussed on SPY (the S&P 500 index) last week. SPY broke below the head
of the inverse head and shoulders pattern on Friday when it traded intraday
below $80 (the low of September 30). Although SPY attempted a reversal rally
when a strong buy program hit at 2:30 pm on Friday, the rally stopped at
resistance of the 40 period moving average on the 15-minute chart, which also
correlates with the upper channel resistance of the downtrend line from the
highs of October 2. The 15-minute chart below clearly shows why the rally ran
out of gas after hitting resistance:
Friday brought new multi-year closing low prices in QQQ (Nasdaq 100
index) and DIA (Dow Jones Industrial Index), with SPY not far behind. However,
both QQQ and DIA set new closing low prices within a matter of only a few cents.
In addition, we also noticed that Friday’s volume on the NYSE was 1.8 billion
shares, the highest since July 31. Since high volume selloffs often indicate a
short-term bottom, we want to keep an eye on whether the volume increases or
decreases during the next couple of days, as well as its relation to the price
movement of the market indices. The Nasdaq, S&P, and Dow all recovered
significantly off their intraday lows on Friday, which also provides a bit of
support going into today. Friday’s break to new lows probably attracted a lot of
“late to the party charlies,” a term we use to describe the retail public who
typically buys at market tops and sells short near market lows. Although the
Nasdaq and Dow both closed at new multi-year lows, we would not be surprised to
see a rally off current levels going into this week because neither of those
indexes really collapsed as they should have upon breaking to new lows. Just
keep in mind there is indeed a lot of overhead price resistance that has been
created and volume will be the key factor to watch.
Going into today, the
key price levels to watch are the 40 period moving averages on the 15 minute
charts for both SPY and QQQ. For SPY, this price level equates to approximately
81.30 and it equates to approximately 20.60 for QQQ. During the past three
trading days, the 40 period MAs have served as resistance, as you can see on the
SPY chart above. If SPY or QQQ is able to sustain a rally above these price
levels, it could serve as good opportunities for long trade entries. However, we
also need to watch the downside because there is not a lot of price support if
we trade below Friday’s lows. For QQQ, watch the support levels of 20.11 – 20.19
and watch 79.58 to 79.75 for support on SPY. If the market trades below either
of those prices, we will look for short opportunities.
One final point to
keep in mind is that Bush will be addressing the public this evening at 8 pm EST
to present his case against Iraq (again). There may be some market jitters ahead
of that address based purely on the uncertainty of what he will say.
Today’s watch list:
PPH – Pharmaceutical Index HOLDRS
Sector:
Pharmaceutical
Short
Trigger = HALF at 68.12, HALF at 67.40
Target
= 64.75
Stop = 69.20
Notes = The Pharmaceutical Index has been holding
up well relative to the market, but started to show signs of weakness on Friday,
especially with the leaders such as MRK and PFE. As you can see from the daily
chart above, this will be the third test of support around the 68.20 range for
PPH, so the odds are increasing that the support will break on the next
test.
We will be shorting a HALF position on a break of 68.12, which is
below the low of September 24. Then, if the selling continues, we will short
another HALF position at 67.40, below the low of August 5. If both of those
levels break, we expect a selloff down to just above the lows of July 18 and 25.
Our stop is just above the next whole number resistance of Friday’s close.
Remember our 20-minute gap rule states that if PPH triggers due to a gap down,
we will not be looking to sell short until it breaks the low of the first 20
minutes of trading.
SPY – S&P 500 Index Tracking Stock
Sector:
n/a
Long
Trigger = 81.58
Target = 82.90
Stop =
80.85
Notes = As discussed above, SPY has been running into resistance of
its 40 period MA on the 15-minute chart. However, Friday’s 2:30 pm rally into
resistance was significant based on the volume and extreme TICK readings that
occurred. Even though the rally did not hold solid into the close, this could
easily be attributed to fear of taking positions long over the weekend.
Therefore, we would not be surprised to see a sustainable break on the next
attempt to break the trendline.
We will be looking to buy only if the
rally confirms itself by not only trading higher than the 40 MA, but also
trading higher than Friday afternoon’s swing high of 81.55. Our target is the
high of Friday, which also correlates to a price just below the 200 period MA on
the 15 minute chart. Our stop is just below Friday’s close, which would also put
SPY back below its trendline support.
Deron’s Report Card:
Both QQQ and SPY short swing trades
triggered, but we closed both of them on the same day. SPY actually triggered
and hit our exact price target of 80.10 during the same day. However, we took
profits prior to the original price target due to market conditions. We also
closed the QQQ short prematurely for the same reason. There was also one
intraday trade in which we shorted BBH for about a point of profit, but we did
not list it below because we were not able to get an alert out in a timely
enough manner to prevent chasing the price down too low. Nevertheless, it was a
profitable day for us on Friday due to the SPY short.
“Swing” trades (per The Wagner
Daily)
Closed Positions:
- SPY short – shorted 81.80, covered half 81.10, covered half 80.67, closed
with + 0.91
QQQ short – shorted 20.38, covered 20.51, closed with
(0.13)
SPY long – (never triggered)
Open
Positions:
- WMH long (from Oct. 2) – bought 30.35, stop at 27.25, target 42.50, open
with (0.61)
Intraday trades (per Intraday
Updates E-mail Service)
- (none)
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