Despite a higher closing price, Friday’s trading session consisted primarily of choppy trading marked by low volume (the lowest on the NYSE and Nasdaq since October 14). Although the low volume is not necessarily surprising given the consolidation we saw last week, it made us reluctant to enter new intraday trades because the trend of low-volume days can reverse easily. In addition, the fact that it was a Friday prompted us to stay in cash because we did not want to have many positions over the weekend.
The biggest thing we continue to watch is the 20-week moving average for the S&P. Even though the S&P futures attempted to break this resistance level several times last week, Friday’s closing price still put the index below this critical resistance point. Remember that the longer time frames such as weekly and monthly charts become more important as we are analyzing longer term trends, such as trying to determine if the current bear market is dying or simply bouncing before setting a new low. It’s interesting to note that although the Nasdaq has broken above the 20-week moving average, the S&P and the Dow have not yet followed suit. This has resulted in the sectors such as the Biotechs (BTK.X) and Software (GSO.X) being above their 20-week moving averages while sectors such as Utilities (DJU) and Oil (XOI) remain well below their 20-week MAs. Until most of the market sectors get in sync with each other, we are likely to see a case of either the S&P dragging the Nasdaq back down below the 20-MA or the the Nasdaq pulling the S&P higher. Both of these scenarios often result in choppy intraday trading. Take a look at the weekly charts of both of these indices and notice the divergence:
Based on the strength of the market into Friday’s close, we are well positioned for breaking last week’s highs in the coming week. This equates to a resistance level of 1002 for the Nasdaq futures and 905 for the S&P futures. Notice how the whole number of 1000 for the Nasdaq and 900 for the S&P has been psychological resistance, which occurs when indexes approach large round numbers (remember the goofy CNBC special report when the Dow broke 10000 three years ago?).
If the Nasdaq and the S&P break above last week’s highs and those prices are able to be sustained after the first 30 minutes of trading, those former resistance levels should become the new support levels and provide an ideal point for placing stops on long positions. However, since Friday’s volume was light, it is important to watch for an increase in volume if the markets break last week’s highs. If the highs are broken without a substantial increase in volume, we would be skeptical of a continuation rally because the volume always needs to confirm the price since volume is a leading indicator.
Finally, be aware that the fast and slow moving averages on the daily chart have not yet crossed over, which would indicate a reversal of the downtrend. Until that happens, along with the 20-week moving average resistance being broken by the S&P, we are approaching this week with cautious optimism.
Today’s watch list:
QQQ – Nasdaq-100 Tracking Stock
Trigger = 24.96 (just above the high of last week)
Target = 26.20 (resistance of the high on Aug. 22)
Stop = 24.40 (below the lower channel support of the uptrend from Oct. 11)
Notes = Despite a short-lived attempt to break below support of the uptrend line last Thursday, the Nasdaq quickly rallied back on Friday (albeit on light volume) and closed near the high of last week. The end result is that we had a week of consolidation near the highs after the recent rally. This consolidation serves as a correction by time and will aid in supporting a breakout from current price levels if the Nasdaq is able to stay above last week’s highs. Remember the opening gap rules on this play.
IWM – Russell 2000 Index Fund (iShares)
Trigger = 74.55 (above the high of Friday and the 50-day MA)
Target = 76.60 (resistance channel on the daily)
Stop = 73.50 (below the lower channel support of the uptrend from Oct. 10)
Notes = This is the only major market index that actually closed ABOVE the high of last Thursday with the rally into Friday’s close. That indicates that the Russell 2000 index (which is very broad based) showed a lot of relative strength into the close. In addition, it closed right at its 50-day moving average. A break above the high of Friday would break the 50-day MA and
MDY – MIDDIES (S&P Midcap Index Tracking Stock)
Trigger = 77.75 (below the 50-day moving average; also below the 20 and 40 MAs on the 60-minute)
Target = 75.25 (support of the 200-MA on the 60 minute)
Stop = 78.70 (above resistance of Friday’s close)
Notes = Out of all the broad-based market indexes we follow (QQQ, SPY, DIA, MDY, etc.), the Mid-Cap index has been showing the most relative weakness on a daily basis. Notice how most of the major indices are well above their 50-day moving averages, but MDY has been having a lot of trouble sustaining a rally above it. If not for the late afternoon rally on Friday, MDY would have closed below the 50-day MA. Although we don’t want to sell short if the market trends up today, we feel that MDY will be one of the first indexes to sell off hard in the event the market heads south. It’s always good to have a “Plan B” not matter what you expect the market to do on any given day.
Deron’s Report Card:
Click here to read the details on how we calculate our report card statistics.
“Swing” trades (per The Wagner Daily)
QQQ short – (did not trigger)
SWH short – (did not trigger)
WMH long (HALF position open from Oct. 2) –
bought 30.35, new stop at 32.70, current points = + 3.85, current net P/L = + $943
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