At the risk of sounding like a broken record, I will again say that yesterday was another extremely choppy day that made any type of trading other than “scalping” difficult to do. While more experienced traders can take advantage of choppy days by trading for small profits and quickly getting out of trades, those are not the type of trades that we focus on because we feel the risk of trading in those conditions is greater than the potential reward. Instead, we chose to sit yesterday out and observe the market reaction to the 50 basis point rate cut by the Feds. In hindsight, we are glad we did not trade yesterday considering how volatile the market was.
This is a good time to remind you, especially if you are new to this business, that being a profitable trader does not mean you need to be in the markets every day. In fact, the most successful traders I know are out of the markets MORE THAN they are in the markets. To prove this, just take a look at your daily profit and loss statement after a year of trading. You will probably see an average of one to two highly profitable days per week, along with three or four days each week where you had small to moderate losses or broke even. If the net result of all these trades is negative, you are probably overtrading. Now, imagine if you could eliminate a majority of the small losing days over the course of the year while still maintaining the highly profitable days. Chances are that you would be rather profitable. Therefore, the question to ask yourself is “How can I eliminate the numerous small losing days while still maintaining my winning days?” The answer for most traders is simple — MAKE LESS TRADES! This is why we always tell you that the most profitable trade on a given day is often to do absolutely nothing! Part of your job, and what we help you to do, is to determine which of those days it is wise to do nothing (such as yesterday). Okay, enough about that, let’s talk about the market…
The S&P and Nasdaq futures began the day yesterday with a large pre-market opening gap up (a knee-jerk reaction to the Republican victories) that quickly faded as the 9:30 am NYSE opening approached. Immediately after the markets opened, sellers took control and drove the major indices back down to the previous day’s close, effectively filling the gap. From that point until the interest rate announcement at 2:15 pm EST, the markets stayed in a relatively tight trading range, chopping around between the opening highs and the previous day’s range. The Nasdaq showed more relative strength than the S&P because it actually formed a triple top at its opening high before finally selling off to the lows of the day around 12 noon. After the interest rate decision was announced, the markets experienced extreme volatility by spiking to new intraday highs, selling off down to new intraday lows, and rallying back up to set even higher intraday highs. The markets eventually decided to rally into the final closing minutes and both the S&P and Nasdaq futures closed near the highs of November 4. Since all this occurred within roughly a ninety minute window of trading, it would have been very easy to experience big losses if you were attempting to trade during that period.
Taking a look at a daily chart of the S&P futures, you will see that the index closed at a very critical point yesterday:
If the S&P breaks above yesterday’s high and trades through the 927 level, it will break the highs of September 11, which is presently acting as resistance. If that level is broken, the next major resistance is not until 965, which is the high of August 22. If the S&P can get above this critical 927 level and stay above it, we could see a significant rally all the way up to 965. The Nasdaq futures has already broken its August 22 high of 1055 and does not have a lot of resistance in the way until the 200-day moving average, which is around 1159.
Based on the analysis above, our plan today is pretty simple. If the S&P and Nasdaq CONVINCINGLY break yesterday’s highs on STRONG volume, we will look for entries to buy SPY, QQQ, and possibly DIA. However, since there is a pre-market gap down this morning, we will need to wait for confirmation of a break of those resistance levels before taking any positions. If the major indices are unable to rally above yesterday’s highs, then it is likely that we will continue to stay in the current trading range for a little while longer. However, we’re not expecting any major selloffs right now either because both the S&P and Nasdaq are above their 20-week moving averages, which should act as solid price support. Whether the markets break out today or not, we’re happy that some significant uncertainties such as Election Day and the FOMC meeting have passed. Now we will let the market decide how it wants to react and we will simply trade in the direction it wants to go. We’re ready either way.
Today’s watch list:
MDY – “MIDDIES” (S&P Mid-Cap SPYDER)
Trigger = 81.05 (above resistance of the weekly high)
Target = 82.40 (resistance on the daily)
Stop = 80.40 (below support of the breakout point)
Notes = This chart is similar to the SPY daily that we discussed above. We have been seeing a lot of seasonal money flowing into the mid-cap stocks, so we are watching for a breakout in the mid-cap index here.
SPY – “SPYDERS” (S&P 500 Index Tracking Stock)
Trigger = 91.77 (above resistance of the weekly high)
Target = 90.80 (support of the low of yesterday (and the week); also the lower channel support of the trendline from Oct. 10)
Stop = 92.25 (above resistance of the 20-MA on the 15-min. chart)
Notes = Although we are not anticipating a huge selloff, we want to have a short position ready to go in the event the market does not recover from the opening gap down. In the case of SPY, we are looking to short it once it breaks support of its 20-period MA on the 60-minute chart. This level has acted as a solid support level for SPY during the past several days and we anticipate it would act as an equally solid resistance level if it drops below it. This would also represent a break of the 20 and 40-period MAs on the 15 minute chart, adding additional overhead resistance.
Daily Reality Report:
The “Republican Gap” in the market yesterday stopped us out of our SMH position from overnight. However, we played it properly by covering half on the opening retracement and setting a stop over the high of the day on the second half. That reduces risk of the trade running out of control, but also allows us the ability to realize a potential profit on half of the shares if the market continues its selloff. Trade management is key!
Click here to read the details on how we calculate our Reality Report statistics.
“Swing” trades (per The Wagner Daily)
SMH short (from Nov. 5) –
shorted 25.39, covered 25.72, points = (0.33), net P/L = ($213)
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