Commentary:

Yesterday morning was a prime example of how the previous day’s high, low, and closing price usually represent significant support and resistance levels. In the case of the S&P (SPY) yesterday, the open began with a gap down to near the previous day’s low. A few minutes after the open, the market began rallying in an attempt to fill the gap. By the 9:50 am reversal period, SPY had rallied to the previous day’s close precisely to the penny. After being unable to break the resistance of the previous day’s close, it immediately started to fall back down to the opening gap (the low of the day). After several failed attempts to hold support, SPY finally cracked below the previous day’s low, which caused that price to become the new resistance level. From 10:45 EST to 11:30 EST, SPY kept attempting to rally and reverse the morning downtrend, but was unable to get above the new resistance level of the previous day’s close. This made the previous day’s lows a logical place to lower our stops to with our open short positions we had. After being unable to break the previous day’s low, SPY made another leg down and set a new intraday low before finding support at the low of October 21, which is also the 200 MA on the 15 min. chart. After being unable to set a lower low, which would have indicated a continuation of the intraday downtrend, we tightened our stops to lock in profits in the event of an afternoon reversal, which is what occurred.

The Nasdaq traded in a similar pattern to the S&P yesterday morning, but quickly began to show relative strength to the S&P index. After running into resistance of the previous day’s close, QQQ also sold off back down to the low of the day, but actually found support at the previous day’s low, whereas the S&P broke the previous day’s low and did not find support until the low of October 21. Since the Nasdaq was showing relative strength to the S&P, this made us a little cautious about getting too aggressive on the short side of the S&P because the Nasdaq was holding up the broad market. As we anticipated, the Nasdaq formed a double bottom off the intraday lows around 12 noon, and rallied to break resistance of the 20-period MA on the 15 minute chart by 1 pm. Since the SOX index was very strong in the early afternoon, we added to our SMH swing trade once it broke resistance because we also the Nasdaq turning around. Although we were not surprised to see the Nasdaq rally into the close, we were a bit surprised that the Nasdaq managed to rally above the high of October 21, which caused the Nasdaq to set a new high not seen since August 27. However, the S&P continued to lag the Nasdaq during the afternoon rally because the S&P never got enough momentum to break the highs of October 21.

Although it is not very common, yesterday provided us with solid trading opportunities on the short side in the morning and the long side in the afternoon by establishing a steady trend both directions during the same day. The end result was a profitable morning with our DIA, SPY, and MDY shorts that we covered before the reversal and a profitable afternoon with our SMH and WMH longs that we rode all the way up.

Going into today, the main factor we want to be aware of is that even though the Nasdaq broke out yesterday afternoon and rallied through its weekly resistance, the S&P did not follow suit. Therefore, until the S&P confirms the rally by breaking to a new weekly high, we would be a bit cautious with entering new long positions in the Nasdaq unless you are looking to take them as multi-week position trades. By the way, did you figure out why the S&P did not set a new weekly high but the Nasdaq did? The answer is the resistance on the WEEKLY chart. Hopefully you are remembering to study not only the daily but the weekly charts because the longer term charts often show a key resistance or support level that you may not easily see on a daily chart. In this instance, the S&P has not yet been able to break the 20-week moving average, which is what aided in stopping the rally again yesterday. However, the Nasdaq actually broke its 20-week moving average earlier this week, so that is now a support level for the Nasdaq rather than a resistance level. That explains why the Nasdaq has been so much stronger than the S&P lately.

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Today’s watch list:

QQQ – Nasdaq-100 Tracking Stock
Sector: n/a
Long

Trigger = 24.47 (above the high of Oct. 21; former weekly resistance)
Target = 25.49 (near the high of Aug. 27)
Stop = 23.95 (below 20 MA on 60 min.)

Notes = This is simply a breakout play. After forming a pennant continuation pattern on the daily chart, the next major resistance for QQQ is about a point higher than where it closed yesterday. Since 24.45 was the breakout point from Oct. 21, we only want to enter if QQQ stays above that level. Otherwise, yesterday afternoon would have been a failed breakout.

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SMH – Semiconductor Index HOLDRS
Sector: Semiconductor
Long

Trigger = 23.25 (above the weekly high)
Target = 25.25 (resistance of the high of Sept. 11; also the 20-week moving average)
Stop = 22.35 (below support of the 22.50 area from Oct. 21 and 23)

Notes = The Semiconductor sector really has been impressing us this past week because of its resilience despite the fact that INTC and TXN both had negative earnings reports. The fact that the SOX index keeps rallying despite this bad news from two of the leaders indicates to us that the bad news is already priced into shares of these stocks. Strong volume in this index yesterday confirms the move also. The SOX index also has some more room to the upside before running into resistance of the 20-week moving average.

Even though we are already in a long position of SMH, we will add to the position (making it a double size position) if it breaks resistance on the daily chart because that would probably enable SMH to hit our target of the $25 range. However, we are using a tighter stop on these additional shares in the event the breakout fails.

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BBH – Biotech Index HOLDRS

The Biotech index has been weak the past couple of days and only managed to rally yesterday afternoon due to broad strength in the market. However, if the market reverses and heads south today, the Biotech index will probably be one of the first sectors to lose support. Therefore, we will be watching BBH on the short side today if the market gets weak. Looks like support is around 87.30, so that would be the key level to watch for a short entry. We’ll send out an email alert if we enter this short.

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Deron’s Report Card:

Click here to read the details on how we calculate our report card statistics.

We covered half of our overnight short positions in DIA and SPY on yesterday morning’s gap down and covered the rest when it hit our stop a few minutes later. This basically resulted in breakeven trades. However, per the intraday emails, we re-entered both SPY and DIA when they traded below their 20 MAs on the 15 minute charts and added to the positions when they broke their lows of the day, giving us a double position size. For simplicity sake, we have averaged our actual sell and buy prices together for both of these re-entries.

“Swing” trades (per The Wagner Daily)

Closed Positions:

SPY short (re-entry yesterday; double position size) –
shorted 88.72 (avg.), covered 88.12 (avg.), points = + 0.60, net P/L = + $198

DIA short (re-entry yesterday; double position size) –
shorted 84.00 (avg.), covered 83.43 (avg.), points = + 0.57, net P/L = + $198

MDY short (from Oct. 23) –
shorted 77.20 (avg.), covered 77.03 (avg.), points = + 0.17, net P/L = + $27

SPY short (from Oct. 22) –
shorted 89.05 (avg.), covered half 88.80, half at 89.23, points = + 0.04, net P/L = + $2

DIA short (HALF position from Oct. 22) –
shorted 84.08, covered half 84.08, half at 84.32, points = (0.12), net P/L = ($5)

Open Positions:

WMH long (from Oct. 2) –
bought 30.35, new stop at 31.35, current points = + 2.50, current net P/L = + $1,220

SMH long (from Oct. 18 and Oct. 21) –
bought 21.97 (avg.), new stop at 21.90, current points = + 1.12, current net P/L = + $744

Intraday trades (per Intraday Updates E-mail Service)

SMH long –
bought 22.05, sold 22.80 (avg.), points = + 0.75, net P/L = + $491

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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