One of the most difficult things about trading during national holidays when the equities markets are still open is that the lack of volume on those days makes it high-risk to enter new trades because reversals can quickly and easily occur on low volume. Volume in the NYSE was just over a billion shares, the lightest volume day since September 16. The Nasdaq volume was just over 1.2 billion, its lightest day since October 14.
After opening slightly down yesterday, both the S&P and Nasdaq futures sold off hard immediately after the market opened. As we saw on Friday, there was divergence with the selling being more intense in the Nasdaq than the S&P. Since the Nasdaq was stronger than the S&P during the markets’ rally last month, it makes sense that the Nasdaq would also lead the indexes back down. Because the selloff was so sharp during the first thirty minutes of trading and it was the third day of selling, we felt it was too high of a risk to enter any new short positions yesterday. In order to profit from yesterday’s selloff without exposing yourself to high risk, you needed to be short from Friday coming into the market open on Monday. We had one short from Friday, but chose not to enter any new shorts for the reasons mentioned above. Although we had SMH listed as a potential short candidate going into yesterday morning, the opening selloff in the Semiconductor Index was so sharp that entering SMH short after the reversal period was too high of a risk. Therefore, we passed it by. Having strict risk management rules will sometimes cause you to miss out on potentially profitable trades, but our goal is not, and never has been, to profit from every single trade opportunity. Rather, we focus on catching the low-risk trade setups that will yield consistent profits over the long-term. This is how our results are profitable nearly every week, despite the fact that we do not make a lot of trades in an average week. Since protection of capital is more important than trying to profit, it does not make sense to chase high-risk trades on a low-volume day.
Since the reversal we were expecting did not come yesterday, we are even more reluctant to enter new short positions today because the odds are even greater that we will see a bounce today. In fact, the long trade setup is pretty clear today because the resistance level of the markets since the selloff began is very clear. Take a look:
Notice how the 20-MA perfectly stopped the rally attempt yesterday. That’s why yesterday’s buy setup was ONLY if it broke that resistance level, which it never did. As you can see from the chart above, the clear play today is to buy once the upper channel resistance of this trendline is broken. Assuming volume picks up today, a break of this trendline will likely spur a significant, tradeable rally. Since the Dow, S&P, and Nasdaq charts all look similar to one another, we will be looking for long entry points in each of those indexes today. Whether we day trade them or take them overnight will be determined by volume and how much strength they show into the close (assuming they trigger in the first place). By entering these indexes on a break of their 4-day trendline resistance, the risk is low because we will set our stops just below the breakout point where we enter. The profit potential is going to depend on volume and momentum. Also keep in mind the 20-day moving average resistance levels on the daily charts of SPY, QQQ, and DIA. Each of those indexes broker their 20-day MAs yesterday, so that will now serve as resistance. Additionally, SPY and DIA also have resistance of their 100-day moving averages overhead.
Our plan going into today is that our bias is slightly positive, but we are not going to buy until we get confirmation by breaking the resistance levels. If that does not happen, we will probably stay in cash again today. However, if the resistance levels are broken, we feel it is low-risk to buy here and will simply use trailing stops to lock in profits as we see how far the rally will go.
Today’s watch list:
SPY – SPYDERS (S&P 500 Index Tracking Stock)
Trigger = HALF at 88.75, HALF at 89.05 (legging into position based on breaks of 20 & 40 MAs on the 15-min. chart)
Target = 90.05 (price resistance from the consolidation highs on the afternoon of November 8 and 20 MA on 60 min. chart)
Stop = 88.35 (below support of the 20-MA on 15 min. breakout level)
Notes = As discussed in the commentary above, we are looking to buy on a break of the upper channel resistance from the downtrend that started on the high of November 6. We will leg into the position to reduce risk and maximize profits. Since the market is gapping up this morning, remember the opening gap rules if SPY triggers on the open.
DIA – DIAMONDS (Dow Jones Industrial Average Tracking Stock)
Trigger = HALF at 84.50, HALF at 84.75 (legging into position based on breaks of 20 & 40 MAs on the 15-min. chart)
Target = 85.45 (price resistance from the consolidation highs on the afternoon of November 8 and 20 MA on 60 min. chart)
Stop = 84.15 (below support of the 20-MA on 15 min. breakout level)
Notes = Similar play to the SPY setup above. Since the market is gapping up this morning, remember the opening gap rules if DIA triggers on the open.
QQQ – Nasdaq 100 Index Tracking Stock
Trigger = 24.70 (resistance of the 40 MA on the 15-min. chart)
Target = 25.10 (price resistance from the consolidation highs on the afternoon of November 8 and 20 MA on 60 min. chart)
Stop = 24.45 (below the upper channel resistance of the breakout level)
Notes = Similar play to SPY and DIA setup above, except that we are only buying on a break of the 40 MA since the Nasdaq has been weaker than the S&P. Since the market is gapping up this morning, remember the opening gap rules if QQQ triggers on the open.
Daily Reality Report:
Our trailing stop got hit on XLF yesterday morning, basically causing a break-even trade. As explained in commentary above, we chose not to enter the SMH short, though it would have worked out to be a profitable trade. We also were watching SPY for a long day-trade yesterday, but it never hit our buy trigger. Probably a day early on that one.
Click here to read the details on how we calculate our Reality Report statistics.
“Swing” trades (per The Wagner Daily)
XLF short (from Nov. 8) –
shorted 22.29, trailing stop hit at 22.25, points = + 0.05, net P/L = + $14
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