After a short-lived rally attempt by the Nasdaq and the SOX index on the open, both the S&P and Nasdaq quickly fell into a tight trading range and became choppy for the duration of the morning session and into the early afternoon. Although the Nasdaq tried on several occasions to break the high of the day, the weakness in the S&P prevented the Nasdaq from breaking out. This is why we mentioned via email that we were not interested in entering QQQ long despite the fact we had the play listed in yesterday morning’s daily report. Having a chart setup that overlays the S&P futures with the Nasdaq futures is a good idea because it allows you to see whether or not there is divergence between the two indices at a glance. When one of the indexes is not in sync with the other, we know that it is rare that the other index will go very far in the direction of its trend.
Going into the early afternoon, we noticed a pennant formation on the 15 minute chart of the S&P futures, which indicated that a big move was likely later in the afternoon session. Although pennants are usually continuation patterns in the direction of the trend, we had a feeling this pennant was going to resolve to the downside based on the fact that the S&P was unable to get past the high of October 21 and had formed a double top off that price level. The other bearish indicator we noticed was the fact that every time the tick started rising in the afternoon session, the price of the S&P was not able to rally with the tick. In other words, there was divergence between the price action of the market and the direction of the tick. Whenever you see divergence like this, it usually indicates the market is going lower (or higher if the tick drops and the price of the market does not). Based on these two indicators, we set trigger prices to get short two of the weakest indexes, SPY and DIA. After the market broke support around 1:30 pm, our shorts triggered and later resulted in two profitable trades (although our trailing stops were just a tad too tight yesterday).
When we were doing our research last evening, we did not come across very many plays that have good chart setups for swing trading. Most of the ETFs we scanned and studied broke below moving average support on their 15 and 60-minute charts, but are now at support of their 50-day moving averages. Since daily charts generally provide more significant support than intraday charts, we had to look for short plays that were about to break support on their daily charts, but lagged the market yesterday. As for long plays, we didn’t come across anything we really liked that much due to resistance of yesterday’s selloff, although we should continue to keep an eye on SMH because the SOX index actually held up pretty well during yesterday’s selloff. The bottom line is that we’re not too excited about entering any new trades on either side of the market because we anticipate choppy trading today. If, however, a trend becomes established, we’ll be ready to go in the direction of the trend.
Today’s watch list:
Because we don’t want to be heavy in position size over the weekend, we are only entering HALF position sizes on any trades that trigger today unless otherwise mentioned via email.
QQQ – Nasdaq-100 Tracking Stock
Trigger = 23.55 (below support of last week’s highs)
Target = 22.85 (support of the 50-day moving average)
Stop = 23.85 (above resistance of the 200-MA on the 15 min.)
Notes = Although we don’t think it is likely this play will trigger today, we want to be ready to go short if it does because it would indicate a critical break of support that would probably bring the Nasdaq back down to its 50-day moving average.
SWH – Software Index HOLDRS
Trigger = 25.85 (below the 40-MA on the 60 min.)
Target = 25.00 (support on the daily chart)
Stop = 26.20 (above resistance of yesterday’s close and the 20-MA on the 60 min.)
Notes = The Software index is one of the few sectors that didn’t correct much yet. Since it is lagging the market, there is a good possibility we will see weakness in this sector today unless the broad market is strong. The index does not trade huge volume, but is liquid enough to day trade. We recommend using limit orders and going between the spread to get filled.
Deron’s Report Card:
Click here to read the details on how we calculate our report card statistics.
QQQ triggered by a few cents, but we mentioned we were not entering any new longs because we anticipated choppiness in the markets. SMH triggered for the additional entry, but we closed the position a short timer later (with a profit) for the same reason. We also took profits with a tightened trailing stop on both our SMH and WMH (half of it) swing trades. Quite a profitable day overall as we closed out some swing trades.
“Swing” trades (per The Wagner Daily)
SMH long (from Oct. 18 and Oct. 21) –
bought 21.97 (avg.), sold at 23.55, points = + 1.58, net P/L = + $1,058
WMH long (sold HALF position from Oct. 2) –
bought 30.35, sold at 33.75, points = + 3.40, net P/L = + $832
SMH long (additional position added yesterday) –
bought 23.45 (avg.), sold at 23.72, points = + 0.27, net P/L = + $154
QQQ long – (did not enter)
WMH long (HALF position open from Oct. 2) –
bought 30.35, new stop at 32.70, current points = + 3.40, current net P/L = + $832
Intraday trades (per Intraday Updates E-mail Service)
SPY short (HALF position) –
shorted 89.85, covered 89.65, points = + 0.20, net P/L = + $15
DIA short (HALF position) –
shorted 84.57, covered 84.14, points = + 0.43, net P/L = + $35
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