With the exception of a failed breakout attempt that briefly broke above Friday’s highs around noon, both the S&P and Nasdaq traded in a relatively tight range yesterday, consolidating near the highs of Friday. As discussed yesterday morning, we expected the market to either correct by time (consolidate) or correct by price (retrace); it did the former. This was the most healthy scenario that could have occurred because the consolidation enabled a subsequent rally to be more sustainable. If the market would have rallied sharply yesterday and set new highs for the third day in a row, it would have decreased the probability of being able to sustain a subsequent move to new highs. Although it made intraday trading a bit challenging yesterday (except for scalping), the sideways consolidation actually positioned us better for the next several days. It was also bullish to see the buying interest into the final half-hour, which enabled the major market indices to close near their intraday highs.
Volume was very light in both the Nasdaq and NYSE yesterday, but that was actually a positive indicator in this particular instance. When a market rallies sharply off of oversold lows, the key is watching for sellers to step in once the rally stops. If sellers do not come back, volume will typically be light while the buyers were taking a break. However, high volume without a corresponding move higher would have indicated there were still sellers present in the market. Remember that volume is the most important technical indicator we follow, and it is a leading indicator too. Volume will probably pick up if the S&P and Nasdaq break their two-day highs, which would then spur another rally day. So, light volume is not always a bearish indicator.
Despite the sideways action of the markets yesterday, there was relative strength in the Biotech (BTK.X), Software (GSO.X), and Pharmaceutical (DRG.X) Indexes. In fact, both of these indexes are among the few sectors that are now above their 40 day moving averages. The weekly charts also look good because both of these sectors are in the process of breaking the upper channel of their weekly downtrends. The Semiconductor (SOX.X) Index, which rallied nearly 20% off the lows of last week, took a rest yesterday, but recovered and showed a bit of strength into the close. Retail (RLX.X) and Oil Service (OSX.X) Indexes were also strong yesterday, both of which have been weak during the past several months. Yesterday was a sector rotation day.
It seems the market sentiment is starting to shift from selling into strength to buying weakness in most of the sectors. For today, the key is to watch the two-day highs in both the S&P and Nasdaq. For the S&P futures, the two-day high resistance level to watch is 845. For the Nasdaq, the corresponding level is 908. There is also resistance of a 40-day moving average at 911 in the Nasdaq futures. If we break the double-tops AND volume increases, we could see another strong move to the upside. Shorts are a bit tricky here because just about every sector and ETF we follow has been building solid support during the past several days. However, if any of the indexes break the lower-channel support of their three-day uptrends, that would be the place to initiate some shorts.
Today’s watch list:
SPY – SPYDERS (S&P 500 Index Tracking Stock)
Trigger = 85.10 (above the 2-day high)
Target = 87.80 (resistance of 40-day moving average)
Stop = 84.35 (below the lower channel support of the three-day uptrend; this is also the 200 MA on the 60-minute chart)
Notes = As explained above, we are looking for a break of the two-day high that should carry SPY to the 40-day moving average. However, since the futures are gapping up this morning, remember our gap rule! If SPY opens above the trigger price due to a gap up, we will wait for a break of the 20-minute high before buying. Otherwise, we risk buying at the top if the gap gets filled.
PPH – Pharmaceutical Index HOLDRS
Trigger = 73.40 (above yesterday’s high)
Target = 74.97 (just below the high of Sept. 11)
Stop = 72.80 (below the breakout level of 73; should be new support)
Notes = When PPH closed above 73 yesterday, it represented a significant breakout that is likely to be sustainable for the next several days. This is best seen on a daily chart, which shows PPH has broken above its 40-day moving average and also on a weekly chart, which shows PPH has broken above its 20-week moving average. Confirmation would occur with a new high today that does not retrace back below the 73 breakout point. Opening gap rules apply.
QQQ – Nasdaq 100 Index Tracking Stock
Trigger = 22.60 (above the 40-day moving average; also above the two-day high)
Target = 24.30 (just below the high of Sept. 11)
Stop = 22.25 (below the breakout level of yesterday’s high)
Notes = Another breakout play above the two-day high and the 40-day moving average. Not much resistance in the way until the Sept. 11 highs. Opening gap rules apply.
RTH – Retail Index HOLDRS
Trigger = ABOVE 74.00 (near yesterday’s high)
Target = n/a (will send e-mail update based on amount of gap)
Stop = 75 cents above the 5-minute opening high (whatever that price may be)
Notes = Since it did not trigger yesterday, we may have been a day early entering this short. However, this sector showed relative weakness into the final hour of trading yesterday by selling off into the middle of its trading range as the market was rallying towards its highs. Big volume yesterday too, which indicates sellers are still present in this sector. Since RTH will probably gap up with the market today, we will be looking to fade the gap up on the short side. We will send an intraday email alert with updated stop and target prices if it triggers on the open.
Deron’s Report Card:
Yesterday was pretty uneventual because neither of our swing trades triggered. Although BBH was very strong and actually exceeded our price target we estabilished yesterday, it did not gap down with the rest of the market. Therefore, the entry price we were looking for never triggered and we did not buy it. Sector rotation back into the formerly weak sectors also prevented the RTH short from triggering.
Our WMH trade crept a little higher yesterday and the index is continuing to look better. It has now joined the ranks of the few ETFs that are above their 40-day moving averages. In addition, it has broken the upper channel of the downtrend on the weekly chart (based on the highs of December 2001). With a little bit of help from the markets, WMH could start to see some momentum higher. We will be raising the stop on WMH if it breaks the 2-day high today.
We attempted one intraday trade when we saw the market break resistance in the morning, but the breakout failed, stopping us out for a small loss. As soon as we determined the market was likely to stay in a trading range for the rest of the day, we avoided entering any new day trades. In hindsight, this was probably a wise decision given the multiple false breakout attempts.
“Swing” trades (per The Wagner Daily)
RTH short – (did not trigger)
BBH long – (did not trigger)
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)
SPY long – bought ____ , stopped out _____, closed with (___)
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