Commentary:

After gapping down below the lows of October 17, the major market indices recovered on Friday morning and were actually testing Thursday’s highs by 11:00 am EST. However, after that short-lived rally, the markets once again fell into a tight trading range and consolidated near the high of October 17. The Nasdaq showed relative strength to the S&P into the final hour of trading, closing at the high of the day, which also created a new four-day high. However, the S&P continued to go sideways into the close and did not have enough momentum to set a new high into the close.

Last week’s numerous gaps and subsequent tight trading ranges made it difficult for intraday trading, but also made overnight trades challenging because of the indecision created by INTC’s negative earnings report on October 16. Nevertheless, the markets were resilient last week, as confirmed by Friday’s reversal from below Thursday’s lows to the highs. If you look at a daily chart instead of a shorter-term intraday chart, you can see the bullish consolidation of the last week.

The bear market is definitely starting to fade a bit, but it is still a bit too soon to confirm the bear market has ended. Primarily, we would need to see a rally above the 20-period WEEKLY moving averages on the major market indices, which we have not seen yet (although several individual market sectors are now above their 20-week moving averages). A crossover of the 20 and 50 day moving averages on the S&P and Nasdaq would also confirm the reversal. So, while we are thinking the market probably goes higher from here, a bit of caution is still in order, especially because the rally has yet to see any kind of normal price correction (although it could correct by time instead of price).

Since we are already long a few positions, we are targeting some short setups for today that we feel pretty confident about, which will aid in hedging our long positions if the market corrects by price this week. If the market breaks the key levels we have listed below, there is a good chance we will realize several points of profit on each one of the three short setups below.

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Today’s watch list:

DIA – Diamonds (Dow Jones Industrial Average Tracking Stock)
Sector: n/a
Short

Trigger = 82.15 (below lower channel support of uptrend from Oct. 10; also below shelf of support at 82.30 and 20 MA on 60-minute chart)
Target = 80.25 (low of Oct. 16; also 200 MA support on 15 min. chart; the daily gap will likely be initial support)
Stop = 83.15 (resistance of Friday’s close)

Notes = Although the Dow could correct by time and simply consolidate at the highs, we feel it is more likely that we will additionally see some price correction. Primarily, this is due to the fact that the price has run into resistance of the upper channel of the downtrend on the WEEKLY chart, which is a KEY resistance level. Although there is support at Friday afternoon’s trading range, a drop below 82.20 would represent a break of support of the uptrend from the lows of October 10 (also the 20 MA on 15 min.), likely spurring a selloff.

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SPY – SPYDERS (S&P 500 Index Tracking Stock)
Sector: n/a
Short

Trigger = 87.70 (below lower channel support of uptrend from Oct. 10; also below shelf of support at 87.85 and 20 MA on 60-minute chart)
Target = 85.95 (low of Oct. 16; also 200 MA support on 15 min. chart; the daily gap will likely be initial support)
Stop = 88.70 (resistance of Friday’s close)

Notes = This is the same exact play as the DIA short above because both indices are trading in sync with each other.

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IWM – iShares Russell 2000 Index Fund
Sector: n/a
Short

Trigger = 71.90 (below lower channel support of uptrend from Oct. 10; also below 20 MA on 60-minute chart)
Target = 69.80 (low of Oct. 16; also 200 MA support on 15 min. chart; the daily gap will likely be initial support)
Stop = 72.65 (resistance of Friday’s close)

Notes = Again, a similar play to both SPY and DIA shorts above, except this one has a better reward/risk ratio based on stop/target amounts.

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Deron’s Report Card:

We got stopped out of both SMH and PPH longs (HALF positions) due to the large gap down on Friday, but we re-entered both of them due to the market reversal into the early afternoon. We are using loose stops on both of these longs because we anticipate a bit of a price correction in the broad markets during the next several days, but we want to stay long SMH, PPH, and WMH because all three of these sectors have been showing a lot of relative strength. Therefore, we are keeping our position sizes small enough to be able to handle a few points of price swing. We are also planning on entering today’s shorts if they trigger, which will aid in hedging our long positions.

“Swing” trades (per The Wagner Daily)

Closed Positions:

SMH long (from Oct. 17) – bought HALF position 21.65, stopped out 21.20, closed with (0.23) (HALF position)

PPH long (from Oct. 17) – bought HALF position 76.10, stopped out 75.56, closed with (0.27) (HALF position)

Open Positions:

SMH long (from Oct. 18) – bought HALF position 21.75, new stop 20.40, target 25.25, open with + 0.20

PPH long (from Oct. 18) – bought HALF position 76.45, new stop 73.90, target 81.10, open with (0.37)

WMH long (from Oct. 2) – bought 30.35, stop raised to 30.20, target 42.50, open with + 1.70

Intraday trades (per Intraday Updates E-mail Service)

(none)

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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.

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Yours in success,

Deron M. Wagner