Despite early weakness that put the S&P below the lower channel support of the uptrend from October 10, all the major market indices showed a lot of relative strength yesterday by reversing and breaking above the highs of last week. When the S&P and Nasdaq both broke above last week’s highs, the rally kicked in high gear because that was a critical level that everyone was watching. A break above those highs essentially showed the market was so strong that it merely corrected by time (last week) rather than price.
Of particular interest yesterday was the Semiconductor (SOX) index, which showed a lot of relative strength after breaking above the 50-day moving average for the first time since April 2002. Although the index tested the 50-day moving average both in May and August, yesterday was the first time the index was able to have a closing price above that level in over six months. Confirmation would occur by a sideways consolidation above this level before making the next leg up. Utilities and Cyclicals were also strong yesterday, which is significant because those are historically among the first sectors that lead a recovery out of a bear market. Airlines were also strong, which should be no surprise given how beaten down they have gotten over the past year. One of the weakest sectors yesterday was Gold (GOX), which closed down on the day.
By paying attention to which sectors are leading and lagging the markets, it gives us an idea of where money is flowing and whether certain key signals that would mark an end to the bear market are in place. Although many sectors are breaking moving average resistance on their daily charts, that is not enough to represent the end of the bear market. Rather, it is now becoming especially important to begin studying the weekly and monthly charts because the bear market will not be over until sectors begin breaking resistance on those longer time frames. Of particular interest is the S&P and Dow Jones, which both closed right at its weekly resistance of the 20-week moving average yesterday. This is likely to cause a normal correction before making another leg higher. The Nasdaq-100 index, which has been showing relative strength to the S&P, actually broke above its 20-week moving average, but it’s not going anywhere without the S&P eventually following suit. Notice the resistance on the weekly chart of the S&P below:
If you were only looking at a daily chart of the S&P, you would not have been able to see this resistance as easily, which is why longer time frames become important at critical price levels such as where the S&P currently is.
It looks like we will see some selling today on the heels of a disappointing earnings report from Texas Instruments (TXN). Although the market was due for a correction anyway, the TXN news simply provides a convenient impetus for the correction to take place; it probably would have happened with or without TXN news. Although we may see a steady downtrend day today, it could get a little tricky because yesterday’s rally put us well above resistance of last week, which is now the new support levels. If we gap down significantly on the open, that will put the market right at yesterday’s breakout level, which should now act as support and could make entering new short setups tricky. This is why we took a HALF position of DIA short overnight because we anticipated a correction in the Dow soon and did not want to miss a gap down, but did not want to get too aggressive in share size without any confirmation, which we will probably get today. We will continue to trail stops on our open long positions and will look for an entry point to add to our DIA short and possibly enter new ones today.
Today’s watch list:
DIA – Diamonds (Dow Jones Industrial Average Tracking Stock)
Trigger = 84.80 (below support of the 20-MA on the 15 min. chart)
Target = 82.30 (support of the 40-MA on the 60 minute chart; also near yesterday’s low)
Stop = 85.35 (above resistance of yesterday afternoon)
Notes = We entered a HALF position of this short yesterday before the close, so this trade will be an addition to our existing HALF position if it triggers. Remember we only add to winning positions, not losers. Also be aware of our gap rule which states that if this trade hits its trigger price due to an opening gap down, we will wait for a break below the 20-minute low before getting short. This usually prevents us from getting caught in a sharp reversal, unless it occurs later in the morning (as it did yesterday).
SPY – SPYDERS (S&P 500 Index Tracking Stock)
Trigger = 89.75 (below support of the 20-MA on the 15 min. chart)
Target = 87.60 (support of the 40-MA on the 60 minute chart; also near yesterday’s low)
Stop = 90.30 (above resistance of yesterday afternoon)
Notes = We were a day early when we entered this short yesterday, but entering this short today could prove to be even more lucrative because there will be many trapped bulls who bought near yesterday’s high and are not able to get out due to the gap down. Therefore, selling momentum could increase.
Deron’s Report Card:
Although we had some solid short setups that triggered, they did not work out for us yesterday because of the markets sharp reversal in the morning. Nevertheless, yesterday was a great example of the importance of using stop losses because our losses would have been nearly tripled if we did not stick to our stop losses. Our long positions all did well yesterday, with the exception of PPH because the Pharmaceutical Index was weak due to sector rotation into the tech stocks. We also added to our existing SMH long position so that we now have a full position size.
Notice that we now have a new, more accurate way of reporting our performance of closed positions each day. This new method factors in actual dollars of profit/loss, including commissions, rather than just points won/last. Click here to read how we calculate this number.
“Swing” trades (per The Wagner Daily)
DIA short – (from yesterday morning’s report; never triggered)
SPY short – shorted 87.72, stopped out 88.71, closed with (0.99), net profit/loss = ($174)
IWM short – shorted 71.85, stopped out 72.70, closed with (0.85), net profit/loss = ($183.92)
WMH long (from Oct. 2) – bought 30.35, stop at 30.20, target 42.50, open with + 2.15
SMH long (from Oct. 18 and Oct. 21) – bought HALF at 21.75 and HALF at 22.18 (average price of 21.97), stop at 20.40, target 25.25, open with + 1.06
DIA short (from intraday update on Oct. 21) – shorted 84.95, new stop at 85.35, target 82.30, open with (0.47)
PPH long (from Oct. 18) – bought HALF position 76.45, new stop 73.85, target 81.10, open with (0.20)
Intraday trades (per Intraday Updates E-mail Service)
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