Yesterday’s Consumer Confidence report dropped to the lowest level in nine years. While this was not a guarantee of a selloff in the market, it helped to fuel the morning selloff in a market that was already technically poised to go lower. If the Consumer Confidence report number would have been positive, the market probably would have rallied a bit as a “knee-jerk” reaction, but ultimately would have probably broken Monday’s lows either way. The report simply caused the markets to rapidly sell off instead of slowly drifting lower, which is probably what would have happened if the report came in line with consensus. While it is always good to be aware of economic reports, we don’t usually alter our trading plans much because of an economic report due to the fact that technical indicators typically cause the market to go in the proper direction regardless of reports.
After the vicious selloff that occurred between 10 – 11 am yesterday morning, the major market indices traded in a tight range near the lows of the day until buyers stepped in an hour before the close and rallied the market back up to the opening price. Since there were a lot of buyers trapped in their positions from the sudden selloff yesterday morning, there was a lot of resistance created just over yesterday’s opening price, especially given the fact that the major indices are now below their intraday moving averages. This stalled the closing rally and prevented the major market indices from closing near their intraday highs. In fact, if you take a look at the 5, 15. and 60-minute charts, you will see that the rally stopped when it ran into resistance of the 200-MA on the 5 and 15-minute chart and the 40-MA on the 60-minute chart. On Monday, these same support levels acted as support for the major indices. In addition, a new micro-downtrend is being created from the highs of Monday. This upper channel will serve as resistance and will also be an ideal place to set the stops on our overnight positions.
Perhaps one of the most significant technical indicators to note is that yesterday was the first day since the rally began on October 10 that the S&P spent the entire trading day below both the 20 and 40-period moving averages on the 60-minute chart. More importantly, the 40-MA crossed up through the 20-MA yesterday, which often indicates a reversal of a trend. The last time we saw the 40 above the 20 was on October 10, the first day of the October rally. Take a look at the annotations we made on some various time frames of SPY (the S&P 500 Index):
Going into today, we don’t have high expectations for a smooth trending day. Most of the major indices are now below support on their intraday charts such as the 15 and 60-minute time frames. However, those same indices have moving average support on their daily charts. Since the longer time frame has more bearing on prices than the shorter time frame, we expect the 50-day MA to provide a bit of support for the indices. If the indices break the 50-day MA, there is support of the 20-day MA just underneath. However, the additional overhead supply (resistance) on a shorter time frame is likely to cause resistance. This combination of factors is often the recipe for a choppy trading day, which is what we expect today.
Finally, keep in mind there is a slew of economic reports coming at us within the next two days. GDP, Employment Cost Index, and Chicago PMI reports are all due to be released tomorrow morning. Jobless Rate, Personal Income, ISM, and Construction Spending are all going to be reported on Friday. On top of all that, there is an FOMC meeting next week on November 6. Our thoughts are that yesterday’s big miss in expectations of the Consumer Confidence numbers may have spooked traders who also fear worse numbers than expected with the host of reports due over the next several days. Although we base all our trades on technical analysis and not fundamental issues such as economic reports, it is a good idea to know the “big picture” of what is happening in the markets.
Today’s watch list:
BBH – Biotechnology Index HOLDRS
Trigger = 87.25 (above yesterday’s high; also above the upper channel of downtrend from high of Oct. 21)
Target = 89.80 (resistance of last week’s highs)
Stop = 86.20 (below the new support channel if it breaks out)
Notes = The Biotechnology Index has an interesting looking daily chart here because it is coming into support of the lower channel of the uptrend from September’s lows and is also approaching resistance of the downtrend line from Oct. 21. This pennant formation is likely to resolve to the upside because the base on the downside (support) is much longer than the upside resistance. Confirmation would occur if volume increases once the pennant is broken.
Daily Reality Report:
Yesterday was quite profitable for us, as we managed our short positions well by incrementally trailing stops on them. Once our overnight positions in QQQ, SPY, and DIA broke the previous day’s lows, we added to the position, creating a full size position with a solid average price. Since the lows were broken right after the Consumer Confidence report came out, we got bad fills on our shorts that we added to, but it still worked out well because the market dropped so hard. That’s why we typically use market orders to enter liquid positions like QQQ and SPY. Although our execution on SPY short was twenty cents below our trigger price, placing a market order at least allowed us to catch most of the selloff yesterday, rather than missing it due to a tight limit order.
After locking in profits by covering our shorts before the mid-day doldrums, we set re-entry points on these shorts in the event the market rallied back up to resistance later in the afternoon. However, since the risk of the market continuing in the direction of the trend is higher later in the afternoon, we only shorted HALF our initial position on the bounce. We got stopped out of DIA and SPY because the rally went further than we anticipated, but we stayed short QQQ and SMH overnight due to broad weakness in the Nasdaq. By waiting for a solid bounce to reshort and by keeping our position size small, we only gave back a small percentage of our morning profits yesterday afternoon. As you are probably learning from our newsletter, managing positions properly is usually more important than being in the right trade. Although both are important, proper position management ultimately is the determining factor in your overall profitability.
One last point is that yesterday was a good example of why we started using a net dollar amount to report our trades instead of just points. If we just were using points, it would appear that we made more money with the DIA and SPY trades than with QQQ. However, we made less profit from each of those two trades than we did with QQQ because we took smaller size due to the volatility difference. This is a more accurate way to report results.
Click here to read the details on how we calculate our report card statistics.
“Swing” trades (per The Wagner Daily)
QQQ short (half from Oct. 28, half from Oct. 29) –
shorted 24.30 (avg.), covered 23.72 (avg.), points = + 0.58, net P/L = + $340
SPY short (half from Oct. 28, half from Oct. 29) –
shorted 89.28 (avg.), covered 87.71 (avg.), points = + 1.58, net P/L = + $260
DIA short (half from Oct. 28, half from Oct. 29) –
shorted 83.66 (avg.), covered 82.56 (avg.), points = + 1.10, net P/L = + $192
QQQ short (HALF position on re-entry from Oct. 29) –
shorted 23.85, new stop at 24.25, current points = (0.07), current net P/L = ($29)
SMH short (HALF position on re-entry from Oct. 29) –
shorted 22.93, stop at 23.30, current points = 0.00, current net P/L = ($4)
Intraday trades (per Intraday Updates E-mail Service)
SMH short (HALF position) –
shorted 23.40, covered 22.69, points = + 0.71, net P/L = + $228
SPY short (HALF position on the re-entry) –
shorted 87.94, stopped out 88.50, points = (0.56), net P/L = ($53)
DIA short (HALF position on the re-entry) –
shorted 82.90, stopped out 83.32, points = (0.42), net P/L = ($38)
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