Commentary:
The Nasdaq futures finally broke out of a three-week consolidation trading range on Friday by breaking through and closing above resistance of 1010. This is a key indicator we have been looking for because a break out of the trading range could suggest we will see another leg higher, leading to better trending days. However, it is important to keep in mind that we are still seeing divergence between the S&P and the Nasdaq because the S&P futures still have NOT broken out of their trading range on the daily charts. This means that the Nasdaq is either likely to pull the S&P higher, thus creating a breakout in that index as well OR the failure of the S&P to breakout will bring the Nasdaq back into its trading range, thereby creating a false breakout. Only time will tell which one of these scenarios will occur, but we think the answer is going to depend on what happens at the FOMC meeting on Wednesday.
As you probably know, most analysts and economists are expecting the Feds to cut the Fed Funds rate at the upcoming FOMC meeting. Many are even expecting a 50 basis point cut. There is no doubt in our minds that this is one of the primary reasons we have been seeing the markets rally and showing such resilience. Although hard to predict with any deal of certainty, a cut of 50 basis points is probably already priced into the market, especially if we continue to rally for the next few days until the meeting. Therefore, we need to be cautious going into Wednesday in the event the cut is less than expected or does not happen at all. While no cut could be interpreted to be a positive sign that the economy is recovering on its own, it would likely cause a bearish knee-jerk reaction in the equities markets.
We did not participate in the rally on Friday because the morning reversal did not trigger any technical levels for us to go long until the Nasdaq eventually broke the 1010 level. However, because the breakout occurred after such a strong parabolic reversal without even a pause, we felt it was likely that the Nasdaq would fail the breakout and come back down into the trading range, which is exactly what occurred. The Nasdaq eventually broke back above the morning high of 1015, but not until after 3:00 pm EST. Since we typically close our intraday positions before the 3:30 pm reversal period, this left us with only limited opportunity for scalping during the final hour (which is not one of our strategies). Therefore, we did not see any low-risk opportunities to buy the Nasdaq, especially given the fact that it was a Friday afternoon. Don’t feel bad if you missed the rally because your goal should be to catch the bulk of the major price moves within a trend, not to catch every cent of a rally. When you try to catch bottoms and tops, you will inevitably take a lot of losses due to higher risk exposure. Besides, we see no reason to be aggressive in the markets until after the FOMC meeting on Wednesday.
Going into today, we see the next major resistance point on the Nasdaq futures as being around 1055, which equates to 26.21 for QQQ. This important price level represents the high that was set on August 22. Since it appears that the Nasdaq is going to see a large gap up this morning and is currently trading at 1037 premarket, this limits the potential for a significant move further to the upside. However, one scenario we could see is that the strength in the Nasdaq pulls the S&P along with it, which would break the resistance of 908.70 in the S&P futures (91.29 on the SPY). If this occurs, it would represent a break of some pretty important resistance levels on the daily chart of the S&P futures and would clear the way for a rally to 927, which is the high of September 11. Therefore, we feel there could be more trading opportunities on the long side within the S&P because a break above the 908.70 level on the S&P would probably spur sector rotation back into the S&P and more of the old economy sectors.
Today’s watch list:
BBH – Biotechnology Index HOLDRS
Long
Trigger = 87.60 (above the 2-day high)
Target = 93.00 (resistance of high of August 22)
Stop = 85.90 (below major moving averages support on 15-minute chart)
Notes = We think that as the semis and other tech sectors begin to get overbought, we will see a sector rotation back into the Biotechs. In addition, the index is now at support of its 20-day moving average, which should push the index to at least test its consolidation highs (which is 90 on BBH). Remember the opening gap rules! Also note this trade has a potentially longer time horizon than our typical trade if it triggers.
SPY – SPYDERS (S&P 500 Index Tracking Stock)
Long
Trigger = 91.40 (above the high of Oct. 28)
Target = 93.30 (resistance of the prior high on Sept. 11)
Stop = 90.40 (below Friday’s high and close)
Notes = Watching for entry in SPY as described in commentary above. Note that the 20 MA has crossed over the 40 MA, which is bullish. Remember the opening gap rules; we will only buy if it sets a new high after 20 minutes.
Daily Reality Report:
Pretty much an uneventful day for us on Friday. We shorted HALF positions of DIA and SPY when they triggered, but we tightened the stops when we saw the strength of the morning market reversal. Because only half of our position size triggered and we tightened the stop, our losses were very small. Those were the only trades we were comfortable entering for the remainder of the day.
Click here to read the details on how we calculate our Reality Report statistics.
“Swing” trades (per The Wagner Daily)
Closed Positions:
-
DIA short (HALF position) –
shorted 83.46, covered 83.62, points = (0.16), net P/L = ($17)
SPY short (HALF position) –
shorted 88.12, covered 88.47, points = (0.35), net P/L = ($32)
Open Positions:
-
(none)
Intraday trades (per Intraday Updates E-mail Service)
-
(none)
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.
Yours in success,
Deron M. Wagner