Yesterday was a perfect example of why we have our opening gap rules in place to protect against large losses. After consolidating for all of last week, the major market indices gapped up above last week’s highs, causing many traders to believe that the market was poised to make another leg up. However, the market lost its mojo almost immediately after opening and began to selloff into the 9:50 am reversal period. By 10:15 am, both the S&P and Nasdaq had filled their gaps, bringing the indexes back into last week’s trading range and effectively “trapping” those who bought the opening gap and did not cut their losses quickly. By 11:15 am, the Nasdaq had violated the lower channel support of the trendline from the low of October 24, which prompted us to short QQQ. However, a low-volume rally during the mid-day doldrums caused us to get stopped out of QQQ. By 2:00 pm, we noticed that both the S&P and Nasdaq both failed to set a higher high by failing to break their opening highs during the mid-afternoon rally. This confirmed the intraday downtrend and caused the major market indices to roll over and test their intraday lows. When this happened, we shorted QQQ, SPY, and DIA on breaks of their 40-period MAs on the 15 minute charts. All the major indices subsequently tested and broke their intraday lows, prompting us to cover half of our shares near the lows of the day before coming into the 3:40 pm reversal period. Although the market rallied into the final fifteen minutes of trading, we were not impressed because the indices failed to take out any significant intraday resistance levels, prompting us to take some shorts overnight in anticipation of follow-through selling today. Although we got chopped around a bit yesterday, we were happy with how we handled the day and eventually ended up with essentially a break-even day (not including the large gain on our WMH swing trade we closed).
Going into today, one factor that will determine market direction is the Consumer Confidence number, which is due out at 10:00 am EST. This number is likely to set the direction of the market the rest of the day. We have noticed that if numbers come in essentially within range of expectations, the market tends to see a knee-jerk reaction and then the trend continues in the direction it was previously headed. In an intermediate-term basis, the market remains relatively strong, especially with strength in some key sectors such as the Semiconductors. However, we feel the market is due for a bit of a retracement on a short-term basis. Yesterday’s weakness could have been the first day of this retracement process because they tend to occur when the most people are going to get hurt (such as a gap-up above previous highs). With the opening gap down this morning, both the S&P and Nasdaq will probably open below their 40-period moving averages on the 60-minute charts, which is a bearish divergence from the recent rally. It will be interesting to see whether or not there is follow-through today. If so, we will add to our existing short positions when support gets broken. However, the market could easily reverse and test the highs from here, so let’s not get too aggressive on the short side right now either. We’ll keep you updated with the intraday email alerts.
Today’s watch list:
Since we are already in three trades from yesterday, we are not specifically targeting any additional trades for entry today because the best-looking trades we see are the ones we are already in (DIA, SPY, and QQQ short). Rather, we will look to properly manage our open positions by adding to them when appropriate and adjusting our trailing stops accordingly.
Deron’s Report Card:
WMH hit our trailing stop yesterday, so we sold the rest of the position for a solid gain. We will watch for a better risk re-entry point. Neither of our long positions triggered yesterday due to the gap rule. MDY short triggered, but stopped us out. We shorted QQQ and got stopped out the first time, but we re-entered QQQ short (along with DIA and SPY short) and it worked well. We covered half of those shares to lock in profits intraday and took the remaining shares overnight with a profit buffer. Details below.
Click here to read the details on how we calculate our report card statistics.
“Swing” trades (per The Wagner Daily)
WMH long (HALF position from Oct. 2) – bought 30.35, sold 34.59, points = + 4.24, net P/L = + $1,047
MDY short – shorted 77.70, stopped out 78.48, points = (0.78), net P/L = ($156)
IWM long – (did not trigger due to gap rule)
QQQ long – (did not trigger due to gap rule)
SPY short (HALF position open from Oct. 28) –
shorted 89.95, stop lowered to breakeven, current points = + 0.34, current net P/L = + $26
DIA short (HALF position open from Oct. 28) –
shorted 84.22, stop lowered to breakeven, current points = + 0.19, current net P/L = + $14
QQQ short (HALF position open from Oct. 28) –
shorted 24.51, stop lowered to breakeven, current points = + 0.02, current net P/L = ($3)
Intraday trades (per Intraday Updates E-mail Service)
- SPY short – shorted 89.95, covered HALF at 89.03, points = + 0.92, net P/L = + $76
DIA short – shorted 84.22, covered HALF at 83.47, points = + 0.75, net P/L = + $66
QQQ short (re-entry) – shorted 24.51, covered HALF at 24.27, points = + 0.24, net P/L = + $67
OIH short – shorted 51.84, stopped out 52.37, points = (0.53), net P/L = ($162)
QQQ short – shorted 24.52 (avg.), stopped out 24.78, points = (0.26), net P/L = ($177)
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