Despite the strong close on Monday, the major market indices gapped down yesterday morning and caught a lot of bulls off guard. After the initial gap down, the market rallied and attempted to fill the gap, but was met by resistance of the 20 period moving average on the 15-minute chart. Since we did not anticipate the rally going past that level, we shorted a few positions into the morning rally and put our stops just above each stock’s 20-MA. In addition, our DIA short from overnight worked well in hedging our long swing trades. Although our QQQ day trade initially stopped us out after it broke through resistance, we re-entered it short once we saw the other major indices lose their momentum and head back down. Even though we initially got squeezed a bit, we stuck to our plan to stay short unless our stops were hit and our shorts became profitable later in the afternoon. I always remind myself that patience is crucial in trading and yesterday was a good example of that because it would have been easy to get impatient and cover before the shorts had a chance to become profitable. We basically had a break-even day yesterday because some of our long positions took a bit of a hit, but having the discipline to stick to our plan resulted in profitability with the short day trades, which essentially made the day a wash.
As of yesterday at 3:30 pm EST, we felt pretty confident we would see follow-through on the downside today because the S&P (SPY) had broken below the lower channel support of the uptrend from October 11, which also correlates with the 20 MA on the 60-minute chart. However, the rally into the final thirty minutes of trading yesterday put the market within striking range of getting back above that trendline again. Therefore, it will be important to pay attention to the first thirty minutes of trading today because that will likely determine the direction of the trend for the remainder of the day. If the S&P and Nasdaq remain above yesterday’s closing prices after the first 30 minutes of trading, the odds are increased that we see a test of the highs of Oct. 21, which would likely result in choppy trading. However, if we are trading below yesterday’s close after the first 30 minutes of trading, it is probable that yesterday’s lows will be broken because momentum to the downside will probably increase the longer the market stays below support of the uptrend line. Most importantly, remember the weekly chart of the S&P that we showed you yesterday is still showing resistance of the 20-week moving average that the S&P has failed to break thus far. Until that level gets broken, we are not going to be very aggressive entering new long positions at current levels. We feel it remains a good idea to be a bit hedged on both sides of the market, which is how we are positioned going into today.
We are biased to the long side during the next several weeks and possibly even months, but we want to be aware of a possible retracement that the market could make before making another move up. We’ll use the 60-minute and daily charts for our shorter term trades and use the dailys and weeklies for trades such as WMH, which we have been profitably holding for a several weeks. Was yesterday simply a breather for the bulls or did it confirm the top at resistance on the weekly chart? Today’s action will tell us.
Today’s watch list:
MDY – Middies (S&P Mid-Cap SPDR)
Trigger = HALF at 77.15 (below yesterday’s low) and HALF at 76.85 (below shelf of support at 77)
Target = 75.50 (support of the 200-MA on the 60-minute chart)
Stop = 77.70 (above resistance of yesterday’s close)
Notes = A break below yesterday’s low would confirm a break of the lower channel support of the uptrend from October 11. A subsequent break below the whole number of 77 would likely cause an increase in selling volume, adding to the selloff.
DIA – Diamonds (Dow Jones Industrial Average Tracking Stock)
Trigger = 83.70 (below yesterday’s low; also below the 20-MA on the 60-minute chart)
Target = 82.50 (support line from October 17 – 21; also the 200-MA on the 15-minute chart)
Stop = 84.30 (resistance of the 20-MA on the 15-minute chart)
Notes = We are still short a HALF position of DIA from yesterday at an average price of 84.08, so this will be an additional HALF position to our existing short. The Dow (DIA) is right on the edge of breaking the lower channel support of the uptrend from the past two weeks, which has been the 20-MA on the 60-minute chart. A break below this level could see an increase in selling volume, spurring momentum to the downside.
If any of the major indices set a new high for the week, we will likely be entering some long plays, which we will update you of via email. However, assuming no new weekly highs are set today, our bias remains to the short side until the market corrects a bit more.
Deron’s Report Card:
Click here to read the details on how we now calculate our report card statistics.
The SPY short did not trigger in the morning because it never traded below its opening 20-minute low. However, we raised our entry price and shorted SPY in the afternoon when it broke support of the 40-MA on the 15 min. chart. We covered DIA from Oct. 21 but then got back in yesterday and took it overnight after covering half of the position intraday. We are still long WMH which is now almost 3 points in the money and are still long SMH with a small open loss. PPH (half position) got stopped out.
“Swing” trades (per The Wagner Daily)
DIA short (HALF position from Oct. 21) – shorted 84.95, covered at 84.42, net P/L = + $42
DIA short (HALF position from Oct. 22; second half still open) – shorted 84.08, covered at 84.10, net P/L = ($4)
PPH long (from Oct. 18) – bought HALF position 76.45, stopped out 73.75, net P/L = ($259)
WMH long (from Oct. 2) – bought 30.35, new stop at 30.80 (below the 50-day MA), current net P/L = + $1,334
DIA short (HALF position from Oct. 22) – shorted 84.08, new stop at 84.30, current net P/L = ($54)
SPY short (from Oct. 22) – shorted 89.05 (avg.), stop at 89.60, new stop at 89.20current net P/L = ($74)
SMH long (from Oct. 18 and Oct. 21) – bought 21.97 (avg.), stop at 20.40, current net P/L = ($376)
Intraday trades (per Intraday Updates E-mail Service)
SPY short (HALF position) – shorted 89.20, covered at 88.58, net P/L = + $99
QQQ short (re-entry) – shorted 24.17, covered half at 24.06, half at 23.85, net P/L = + $112
QQQ short – shorted 23.80, stopped out 24.25, net P/L= ($303)
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