Friday’s low-risk trading opportunity consisted primarily of shorting the selloff that occurred in the late morning session after the major market indices rallied in an attempt to reverse the previous day’s downtrend, failed, and broke to new lows of the day. Although there appeared to be a lot of buying interest on the open, there was too much overhead resistance from the previous day’s selling and most of the major market indices ran out of gas on a test of the 20-period MA on their 60-minute charts. This particular moving average was an important support/resistance level for the Nasdaq and the S&P last week. Before the selloff on November 7, the market kept bouncing off of that level, using the 20-MA as support. However, once the moving average was broken on Thursday, that same moving average became our new resistance level, which is why we used loose stops on our short positions Friday. Keep an eye on the 20-MA on the 60-minute chart today because it is currently acting as the upper channel resistance of the downtrend that started on Thursday.
The sharp selloff that happened around 11:30 am on Friday was an ideal place to take profits on our short positions because there was support on the daily charts. We covered our SPY, DIA, QQQ, and SMH shorts each within pennies of their lows on Friday. Although unusual to cover near the absolute lows, it resulted in a rather profitable day on Friday, despite the fact that we only had HALF share position sizes coming into the day. After we covered our shorts at 11:34 am, we did not enter any new positions for the rest of the day because the selloff occurred so sharply in such a short period of time. This decreased the odds of any significant follow-through for the remainder of the day. As such, the market consolidated near the lows and traded in a very narrow range for the remainder of the day. This eliminated any other low-risk trading opportunities because the S&P traded in just a 7-point sideways range from 11:15 am all the way until the close. The Nasdaq did the same thing in a proportionately narrow range. By being disciplined enough to not re-enter the market while it was trading sideways, we protected our profits from the morning session.
Since consolidation at the lows (also known as a correction by time) usually results in a small gapdown the next day, we took a short position in XLF overnight. However, we did not want to get too aggressive with overnight shorts because today would mark the third consecutive down day. In a trending market, the moves tend to occur in periods of three days before a reversal day comes. With each additional day in a particular direction, the risk of that trend reversing increases. Therefore, the risk of being short today is higher than the risk was on Friday because today is day three of the selling whereas Friday was only the second day. So, we are using caution with entering new short positions at current price levels and are also keeping a tight stop on XLF.
We don’t expect a whole lot of action today because there are conflicting signals that point to both a bullish and bearish scenario today (such as moving averages acting as support on one time frame and resistance on another). Most of the daily charts are showing the indices coming into support, increasing the odds of a reversal back up, although there could be room for one more down day. Also, the bond market is closed today due to Veteran’s Day. This adds to the potential for a choppy day. So, we think today may result in being a SOH (sit on hands) day, but we’ll see what happens.
Today’s watch list:
SMH – Semiconductor HOLDRS Trust
Trigger = 24.20 (below the 20-MA on the 15 min. chart)
Target = 23.40 (support of the 20-day MA)
Stop = 24.50 (above resistance of Friday’s close)
Notes = Although the Semiconductors were weak Friday morning, positive analyst comments on the sector last Friday morning stopped the selling and caused the SMH index to rally a bit on light volume. However, if there is further weakness in the market today, we expect this sector to come right back down to test Friday’s lows and possibly even break them, resulting in a move down to the 20-day MA. Since there is a small gap down in the market today, remember the opening gap rules before entering this position.
SPY – SPYDERS (S&P 500 Index Tracking Stock)
Trigger = 90.60 (above the upper channel resistance of the downtrend from Nov. 7)
Target = 91.55 (resistance of Friday’s high)
Stop = 90.10 (below support of Friday afternoon’s consolidation highs)
Notes = If the market reverses today, SPY is likely go be among the leading indexes based on the fact that it has already tested its 20-day MA, while the Nasdaq still is a bit overbought relative to the same level.
Daily Reality Report:
Click here to read the details on how we calculate our Reality Report statistics.
“Swing” trades (per The Wagner Daily)
SPY short (HALF position; from Nov. 7) –
shorted 90.92, covered 89.65, points = + 1.27, net P/L = + $102
DIA short (HALF position; from Nov. 7) –
shorted 86.22, covered 85.27, points = + 0.95, net P/L = + $80
QQQ short (HALF position; from Nov. 7) –
shorted 25.59, covered 25.07, points = + 0.52, net P/L = + $144
XLF short (from Nov. 8) –
shorted 22.29, stop lowered to 22.45, paper points = + 0.05, paper net P/L = + $13
Intraday trades (per Intraday Updates E-mail Service)
SMH short (HALF position) –
shorted 24.80, covered 23.84, points = + 0.96, net P/L = + $281
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