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The Wagner Daily


Commentary:

The large opening gap up in the Nasdaq yesterday put the index within a few points of its price resistance of 1055 (from the high of August 22). This made the risk of buying QQQ a bit high because we felt the upside was rather limited due to the large percentage opening gap up. On the other hand, shorting QQQ was not a wise idea either because the market held support after the initial 20-minute opening reversal period. Therefore, we did nothing with QQQ yesterday morning in an attempt to minimize risk (always our top priority). The S&P futures, on the other hand, also gapped up but had a little more room to run before meeting resistance of 927 (from the high of September 11). We bought a position in SPY, but raised the stop and kept it very tight to protect against a market reversal (which came later in the afternoon). Our trailing stop got hit in SPY, leaving us with a small profit and the chance to wait for the next solid trading opportunity, which subsequently presented itself late in the afternoon.

As we mentioned yesterday, there were some solid short opportunities yesterday afternoon once the indices broke support. Although we shorted the breakdown and made some nice profit, we were not able to broadcast the real-time entry alert to you. Therefore, we will not count those trades on our official Reality Report today, but we still felt it would be beneficial to briefly show you what made us want to sell short on an annotated graph. Take a look at a 15-minute chart of the S&P futures below:

The annotated graph above shows the technical indicators we saw that prompted us to short the market in the afternoon. First of all, you will notice that after the S&P failed to set a higher high around 1 pm, it sold off down to the morning support level around 917 and bounced off of it, creating the neckline of a head and shoulders. After failing to break above the high of the day (the head), the S&P came back down to the 917 level (neckline), confirming the bearish setup of the head and shoulders. At the same time, there was trendline support from the low of November 1 that gave the S&P support at the same level of 917. Therefore, there was a strong probability that after the neckline AND the trendline were broken, the market was going to collapse. The subsequent break of 917 is what prompted us to sell short. Notice how the selloff really picked up momentum after breaking that critical price level before eventually finding support at Friday’s high (which is where we covered).

On a technical level, yesterday was an important day because it represented a test of major price resistance on both the S&P and Nasdaq that will ultimately determine whether or not October’s rally has any legs. As discussed yesterday, the critical resistance levels the indices needed to break were 1055 on the Nasdaq futures (26.21 on QQQ) and 908.70 on the S&P futures (91.29 on SPY). The large opening gap yesterday put both indices above these levels, but the sharp selloff into the close put both the Nasdaq and S&P back below those critical resistance levels.

The price of 908.70 on the S&P futures represented the intraday high of last week, which was set on October 28. Even though the S&P traded as high as 925 (testing the high of September 11), it closed at 907.40 due to the sharp afternoon selloff. This means that the S&P futures are technically back in the trading range of last week as if yesterday’s breakout never even occurred. Yesterday morning’s sharp rally and even sharper selloff created a bearish candlestick pattern on the daily chart known as a “shooting star” or “gravestone doji.” This pattern is often the first indicator of a rally’s reversal. The next couple of days are crucial because we will see whether the S&P immediately bounces off of support of last week’s highs (remember that former resistance becomes new support) or whether the market comes back down to the lows of last week’s trading range (which would be bearish). A lot will probably be determined by the FOMC Fed Funds rate decision tomorrow.

The Nasdaq futures traded in a similar pattern to the S&P yesterday in that the major resistance level of 1055 (the high of August 22) was broken in the morning session, but the afternoon selloff brought the Nasdaq to close down more than 10 points below that level. Just like the S&P futures, the Naz futures also formed a “gravestone doji” on the daily chart. However, the major difference between the Nasdaq and the S&P is that the Nasdaq still closed well above the highs of last week’s trading range, whereas the S&P did not. If the Nasdaq is not able to get back above the 1055 level, that means that yesterday represented a double top off of August 22 and we probably are headed lower. We will probably not be trading much ahead of the FOMC meeting, but if we spot any solid trade setups, we’ll email an alert.



Today’s watch list:


SMH – Semiconductor Index HOLDRS

Short

Trigger = 25.95 (below support of yesterday afternoon’s close)

Target = 24.50 (support of last week’s trading range highs)

Stop = 26.65 (above yesterday’s resistance)

Notes = The strongest sectors that lead a rally are also usually the first sectors to fall when the market reverses. Based on the weakness of the SOX index into the close yesterday, we would not be surprised to see follow-through on the reversal in the semis today. There is a bit of price support from the highs of November 1, but not much of a solid base until the 24.50 area. Therefore, this play could work out to yield over a large percentage gain if the market is weak today. Remember the opening gap down rules.


Daily Reality Report:

The opening gap rules caused us to get much higher entry prices on the BBH and SPY long positions than initially anticipated, but we kept tight stops, managed it well, and made a little profit. Most of the profit yesterday was made if you were long over the weekend and sold into the morning gap (which was a big risk to take over a weekend).

Click here to read the details on how we calculate our Reality Report statistics.

“Swing” trades (per The Wagner Daily)

Closed Positions:

    SPY long –
    bought 92.02, sold 92.26 (avg.), points = + 0.24, net P/L = + $34

    BBH long –
    bought 88.65, sold 88.73 (avg.), points = + 0.08, net P/L = + $8

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

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