Commentary:
Remember
when we mentioned yesterday that the most obvious trade setups are often the
ones that do exactly the opposite of what you expect? The break of the July 24
low in the S&P futures and subsequent reversal was a prime example of that.
Everyone in the world was watching for a break of the 774 support level, which
was technically considered very bearish. However, once the break occurred, big
money was waiting on the sidelines to start a massive buy program, thereby
causing a false breakdown. This is why we say the most obvious trade setups are
often the least profitable ones.
Fortunately, we covered our SPY short
prior to hitting the original stop because we smelled a reversal day after the
S&P futures rallied right back up to the 774 resistance level within 15
minutes of breaking. For big money, this was just enough to run all the stops
and get long at the bottom. Confirmation of the reversal day occurred once the
high of the day was broken within the first hour of trading. This prompted us to
get long SPY and QQQ, as well as the SMH swing trade that triggered per
yesterday’s morning report. Through sound position management and fractionally
legging out of positions, we sold our SPY and QQQ long trades near the top late
yesterday morning and also re-entered SPY long in the afternoon.
One
thing we especially liked about yesterday’s rally was the high volume on both
the NYSE and Nasdaq, the highest we have seen since the end of July. The high
volume confirmed the rally, but today will be important to determine if we
simply saw a rally up to resistance of the downtrend line or if we break the
multi-month downtrend and see a sustained move to the upside over the next
several weeks. We also notice that the Advance-Decline line also confirmed the
rally yesterday, which is something we have not seen in all the previous rally
attempts of the prior several weeks.
As of now, it looks like there is a
gap up in the futures, which would cause both the S&P and Nasdaq to open
above yesterday’s highs. If the gap does not get filled within the first hour of
trading, it is probable that the market will go higher today, thereby breaking
the upper channel of the downtrend that has been in place since the highs of
August 22.
Please remember to use the gap rule when entering any of our
trades listed below today. The gap rule states that we will not buy any ETF that
triggers on the open due to a gap up in the market UNTIL the ETF breaks above
its high of the first 20 minutes of trading. It is usually better to pay a
higher price for the position by waiting for confirmation of the rally.
Otherwise, you often end up buying at the high of the day, only to watch the gap
get filled and your trade become a loser.
Today’s watch list:
QQQ – Nasdaq 100 Index Tracking Stock
Sector:
n/a
Long
Trigger = 21.30 (above yesterday’s high and the 20 day
MA)
Target = 21.97 (the high of October 2)
Stop = 20.95 (below the 20 MA
on the 15 minute)
Notes = QQQ closed near the high of the day, right at
resistance of both the 20 day moving average AND the upper channel resistance of
the trendline from August 22. A break above this 2-month resistance channel will
likely spur buying momentum. Volume was also strong on QQQ yesterday, which
helps to confirm the rally.
BBH – Biotech Index HOLDRS
Sector:
Biotechnology
Long
Trigger = 82.80 (above yesterday’s high and
resistance on the daily chart)
Target = 85.95 (just below the highs of August
29 and 30)
Stop = 81.20 (below yesterday afternoon’s support)
Notes =
The Biotech index has been strong relative to the market for the past several
weeks. Notice how the sector has not sold off with the market. There was also a
bullish ascending triangle formation on the daily, which is why the sector
rallied so sharply when the market finally did. A rally above yesterday’s high
would be a break of major resistance if it holds that level.
MDY – MidCap Index SPDR
Sector: n/a
Long
Trigger =
71.35 (above yesterday’s high and resistance on the daily chart)
Target =
73.05 (approximate low of October 3)
Stop = 70.45 (below yesterday
afternoon’s support)
Notes = If MDY breaks yesterday’s high, it will have
broken nearly a week’s worth of price resistance with not much price resistance
overhead except the lows of October 3.
RTH – Retail Index HOLDRS
Sector:
Retail
Short
Trigger = 67.80 (just below multi-day price support at
68)
Target = 66.15 (this is a 0.618 Fibo retracement off of yesterday’s
rally)
Stop = 68.60 (just above yesterday’s close)
Notes = Even though
the market is poised to go higher, it is always a good idea to have a trade in
mind in the event the market goes the opposite direction you expect. If the
market is weak, we expect the Retail sector to fade also. This index has been
very weak relative to the market and only rallied yesterday because the broad
market pulled it along with it. It’s unlikely this index goes much higher today
unless the market is very strong.
Deron’s Report Card:
Covered SPY short from early morning with
tightened stop (per intraday email alert) and went long SPY and QQQ based on
market’s reversal action. We realized a small loss on the SPY short, but made
very nice profits on the SPY and QQQ longs, as well as the SMH long (which is
still open per yesterday’s morning report). Our WMH longer-term trade had a nice
rally yesterday too.
“Swing” trades (per
The Wagner Daily)
Closed Positions:
- SPY short – shorted 77.54, covered 77.90, closed with (0.36)
Open Positions:
- SMH long (from Oct. 10) – bought 18.27, stop raised to 18.27 (breakeven),
open with + 0.46
WMH long (from Oct. 2) – bought 30.35, stop at 27.25,
target 42.50, open with (1.00)
Intraday
trades (per Intraday Updates E-mail Service)
- SPY long – bought 78.38, sold half 79.31, sold half 79.80, closed with +
1.17 (average)
SPY long (re-entry) – bought 79.81, sold 80.24, closed
with + 0.43
QQQ long – bought 20.58, sold half 20.83, sold half 20.91,
closed with + 0.29 (average)
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