As short-term traders, we’re always amused when the general public assumes that because the market had a large percentage rally on a given day, we “must have made a killing” on that particular day. In fact, my mother will see that the Dow is up 300 points and say “Wow! I’ll bet you made a lot of money today! (no offense Mom)” Although this would be true for long-term investors who are always in the market and also take huge losses, it is not necessarily true for those of us who are short-term traders who wait for the proper signals before entering positions. Sometimes our most profitable days are when the Dow only closes up 20 or 30 points, but had a steady trend (either up or down) the entire day. However, when the market realizes nearly 100% of its gain from a pre-market gap up (as it did yesterday), intraday trading becomes very difficult. After the market opened yesterday, it essentially traded sideways in a very tight trading range for the entire day, with the exception of the final 30 minutes of trading, which showed some very odd and indecisive price action that you can see on a 5-minute chart.
The reality is that most traders (including ourselves) probably did not make any profits yesterday UNLESS they were already long from the day before. Our sole overnight position coming into yesterday morning was WMH, which gapped up and closed over two points higher on the day. Other than that, all our other attempts to enter trades yesterday on BOTH sides of the market were met with either fractional gains or equally small losses. While Monday’s price consolidation and close near the highs of October 11 was bullish, there was not a great reward/risk ratio to aggressively take a lot of positions long overnight going into yesterday morning. The biggest factor that prevented us from doing so was the barrage of earnings reports that were due after the bell on Monday. If any of the blue chips would have missed earnings, the market would have most likely gapped down the next morning due to Monday’s double top and inability to close above the October 11 highs. Instead, several blue-chip companies such as Citibank reported positive earnings that exceeded expectations (which were previously lowered in many cases). Therefore, we feel it would have been a toss of the dice as to whether or not the market gapped up yesterday morning. Our point in explaining all this to you is to make sure you understand why you should not feel bad if you didn’t “make a killing” from trading yesterday. Remember that our style is not swinging for the fences and making a profit every day; rather, our goal is to consistently pull small profits out of the market on a long-term basis using short-term trading methods. If you look at our performance statistics since this service was started, you will see that we are accomplishing this goal.
Today’s pre-market gap down, which is nearly as large as yesterday’s pre-market gap up is the perfect example of why we don’t gamble by aggressively taking positions overnight during peak earnings season. In case you have not already heard, Intel missed earnings by 2 cents after the close yesterday and the markets immediately tanked, which has carried through into this morning. We will have an opportunity to test the resiliency of the market today based on whether or not the major indices recover from this large percentage gap down today. If so, it could create a trending day that will enable us to enter some new trades. But if the market gaps down and trades sideways all day again, that’s okay with us too. Either way, we’ll be managing risk and focusing on making consistent profits.
Today’s watch list:
SPY – SPYDERS (S&P 500 Index Tracking Stock)
Trigger = 87.40 (below the lower channel support of the four-day uptrend; also below the 20-period MA on the 15 min. chart)
Target = 86.10 (support of the 20 MA on the 60-minute chart; also support of the highs from the end of September)
Stop = 88.20 (above yesterday’s resistance)
Notes = The morning gap down puts SPY very close to breaking the lower channel support of its uptrend from the low of October 9. If it breaks this level, we expect yesterday’s lows to quickly be tested and probably broken. Remember the opening gap rule if it gaps below our trigger price.
DIA – DIAMONDS (Dow Jones Industrial Average Index Tracking Stock)
Trigger = 81.50 (below the lower channel support of the four-day uptrend; also below the 20-period MA on the 15 min. chart)
Target = 80.30 (support of the 20 MA on the 60-minute chart; also support of the highs from the end of September)
Stop = 82.20 (above yesterday’s resistance)
Notes = Same exact setup as the SPY short setup above. Remember the opening gap rule if it gaps below our trigger price.
Deron’s Report Card:
Most of the entry prices on yesterday’s “swing” trades were immediately triggered on the open due to the large gap. As you know, we always utilize a gap rule that prevents us from entering those trades unless they trade above their 20-minute opening highs. While a few of them did eventually break their opening highs, it wasn’t by much. That’s why the profits on those trades yesterday were so minimal; most had already achieved their price targets by the time the market opened.
On a positive note, WMH did well for us yesterday, closing up over 2 points on the day. Notice we have also raised our stop to near breakeven.
“Swing” trades (per The Wagner Daily)
RTH short – shorted 76.16, stopped out 76.45, closed with (0.29)
PPH long – bought 74.66, sold 74.75, closed with + 0.09
SPY long – bought 87.65, sold 88.01, closed with + 0.36
QQQ long – (never triggered per gap rule)
WMH long (from Oct. 2) – bought 30.35, stop raised to 30.20, target 42.50, open with + 2.64
Intraday trades (per Intraday Updates E-mail Service)
SPY long (unreported trade from October 14) – bought 84.32, stopped out 83.89, closed with (0.43)
SPY short – shorted 88.28, covered 88.25, closed with + 0.03
SPY short (re-entry) – shorted 87.12, covered 87.40, closed with (0.28)
QQQ short – shorted 23.28, covered 23.41, closed with (0.13)
OIH short – shorted 53.50, covered 54.14, closed with (0.64)
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