Commentary:
Boy,
what fun yesterday was! Talk about an indecisive market! The 40 period moving
averages on the 15-minute charts served as support on the Nasdaq yesterday,
while serving as resistance for the S&P. Looking at the chart below, notice
how the S&P was so weak yesterday that it failed to even fill the gap down
from the morning. On each rally attempt, the S&P (SPY) stopped right at
resistance of its 40 period moving average on two separate occasions yesterday.
However, notice how the Nasdaq was much stronger and actually traded near the
highs of October 8 for most of the day. Rather than running into resistance at
the 40 MA, the Nasdaq (QQQ) actually found support at the 40 MA throughout the
trading day (until the final hour):
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The Nasdaq showed relative strength
to the S&P for most of the day, until the final hour when the SOX index lost
its strength and pulled the Nasdaq down with it. Until that point, the Nasdaq
was consolidating near its intraday highs and actually poised to break its 3-day
high. However, the S&P and Dow Jones Index were both very weak during that
same time. This divergence between the Nasdaq and the S&P/Dow is what caused
the day to be so choppy. It was a combination of the Nasdaq pulling the S&P
higher throughout the day, while the S&P was simultaneously dragging the
Nasdaq down. It was sort of like a tug-of-war between the indices. The lack of a
trend in the markets occurred primarily because the two major indexes could not
get in sync with each other. This made it very difficult to execute profitable
intraday trades unless you took profits very quickly.
Yesterday was a
good reminder of the fact that often the most profitable trade is doing
absolutely nothing, which is what we did in the latter half of the day. By
executing trades exclusively in the SOX index in the morning, we made a little
profit by putting the odds in our favor by only being in a sector that was
showing relative strength (at least in the morning). Once the market began
getting choppy in the afternoon, we simply protected capital and did
nothing!
Today is judgment day for the S&P futures because the index
closed within 4 points of breaking the low of July 24, which is 774. If the low
of July 24 is broken with conviction on high volume, be prepared for a major
wave of selling because it would represent a new 5-year low. The Nasdaq,
although stronger than the S&P yesterday, also closed near a multi-year low.
The magic number to watch for the Nasdaq futures is 797, which is the low of
October 8.
Even though both the S&P and Nasdaq are perilously close
to breaking major support levels, we have also seen many recent instances of
major support levels being tested just enough to take out stops before zooming
the market back up in the opposite direction. Therefore, although we definitely
want to short the S&P if it breaks the July 24 low, we will wait for
confirmation of a breakdown before getting short. Sometimes the most obvious
plays (such as shorting a break of the July 24 lows in the S&P) are also the
most difficult ones to profitably trade. We shall see. . .
Today’s watch list:
SMH – Semiconductor HOLDRS
Sector:
Semiconductor
Long
Trigger = 18.25 (above the upper channel resistance
of the 3-day trendline)
Target = 19.00 (resistance of the 200 period MA on
the 15 minute chart)
Stop = 17.90 (below the 40 MA on 15 min.
chart)
Notes = We got stopped out of yesterday’s entry into SMH, but we
are not convinced the weakness in the afternoon was legitimate because it came
on weak volume relative to the high volume in the morning. Yesterday morning’s
huge volume in SMH indicated there was some definite buying interest that we
could see once again today. Just need a little bit of help from the market this
time. We have also found that when a stock creates a candlestick that has a long
wick on top after many days of selling, the stock will usually retest the highs
of that wick the next day.
SPY – SPYDERS (S&P 500 Index Tracking Stock)
Sector:
n/a
Short
Trigger = 77.58 (below July 24 low)
Target = 74.60
(Fibonacci support; no other nearby support)
Stop = 78.35 (slightly above
October 8 lows-resistance)
Notes = We will be looking to short SPY only
if it breaks to a new multi-year low (as discussed in commentary above). We are
keeping a tight stop on SPY if it triggers because we want to be cautious of a
false breakdown.
Deron’s Report Card:
SMH was both a swing trade that triggered AND
an intraday trade. Although the SMH day trade was profitable for us, the
weakness into yesterday’s close caused us to get stopped out of the SMH swing
trade.
“Swing” trades (per The Wagner
Daily)
Closed Positions:
- QQQ long (HALF position from Oct. 8)- bought 20.27, stopped out 19.96,
closed with (0.31)
SMH long – bought 18.30, stopped out 17.75, closed
with (0.55)
MDY long – (never triggered)
Open
Positions:
- WMH long (from Oct. 2) – bought 30.35, stop at 27.25, target 42.50, open
with (2.60)
Intraday trades (per
Intraday Updates E-mail Service)
- SMH long – bought 17.81, sold HALF 18.34, sold HALF 17.89, closed with +
0.27 (avg. profit)
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