The major market indices started out yesterday with a gap up to the previous day’s resistance on the open, a retracement that attempted to fill the gap, and a subsequent break of the opening highs after the first reversal period. After a solid rally to resistance of the lows of November 8, the volume became quite anemic, causing subsequent rally attempts to be “sloppy” in the sense that each new high barely had the strength to remain there. However, the Nasdaq was stronger than the S&P yesterday, led by strength in the Semis (which is to be expected after the steep selloff of the past several days). The market action became really interesting during the final hour of trading because not only did the S&P fail to set a higher high, but the intraday uptrend became broken and the S&P collapsed, testing the lows of the morning session. While it is not unusual to see reversal days like that, it was a bit unusual to see this type of action considering that the morning started out as a reversal day to the upside after three consecutive down days. When you see a reversal under those conditions, the rally usually sustains itself at least through the close of that day. Given the volume, we were not surprised to see weakness into the close, but we were a bit surprised to see most of the intraday gains totally erased in the S&P (keeping in mind that the Nasdaq held up much better). As yesterday progressed, I couldn’t help but be reminded of my early days as a novice trader. Particularly, there were two instances yesterday that reminded me of how far I have come, primarily relating to my personal discipline.
The first instance was when the S&P gapped up in the morning after three consecutive days of selling, but then sold off to nearly fill the gap before reversing back up. As a beginning trader, I would have been tempted to buy the opening gap up immediately on the open without waiting for confirmation of the rally. Inevitably, when the S&P started selling off, I would have cut my loss and sold my position, immediately before the market found support into the reversal period and zoomed back up to set new highs. Then I would have been staring at the rally, cursing under my breath that “I should have waited.” The second instance yesterday occurred when the S&P and Nasdaq were both rallying to new highs on light volume during the mid-day doldrums. As a newbie, I would have inevitably been sucked in to buying near the highs without regard to the lack of volume and overhead resistance just because the market kept setting new highs. Of course, I would have gotten long just before the S&P sold off hard at 3:00 pm, virtually giving back all its gains for the day. However, because I’ve learned the hard way through a lot of financial and emotional pain in my early years as a trader, I’ve learned that being 100% disciplined at sticking to my trading plan is the only way to consistently profit as a trader. In the case of yesterday, the only time we were in the market was when all the odds were stacked in our favor, which was right after the market’s first reversal period during the first hour of trading when the S&P and Nasdaq both took out their opening highs. To buy SPY, DIA, and QQQ at that point was relatively low risk because the market confirmed that the morning rally was going to hold and there was not much overhead resistance until the lows of November 8. However, that was the only period during the entire day that we saw as low-risk. Our opening gap rule kept us out of trouble by preventing us from buying at the highs without waiting for confirmation. Later in the day, we made a judgment call to sit out the early afternoon attempt at a rally because volume was very light and we were not convinced the rally would hold because of that. Once the market started selling off going into the final hour of trading, going short was not exactly a good risk because there was no solid technical indicator to tell us whether the selloff would continue into the close or whether it would reverse back up to the highs at any given moment. So, although we were only in the market yesterday for less than an hour, we had a profitable day without exposing ourselves to much risk. My point in rambling on about this is to reinforce the point that having strong personal discipline to stay out of the markets when the odds of trading are not totally in your favor is the key to being consistently profitable nearly every month. Without discipline, which takes a lot of hard work for most people, your odds of succeeding as a trader are slim to none.
Going into today, we’re not very excited about the trade setups out there. Yesterday’s trading action into the close put the major market indices in “no-man’s land,” meaning that the indices could go either way from here. While the weak close in the S&P after an attempted rally suggests that the markets should head lower today, there remains a good deal of support on the daily charts. This is likely to cause choppy trading conditions because the market will run into a lot of overhead resistance on any attempt to rally, but it is not likely to collapse today either given the daily support levels. Furthermore, the divergence between the Nasdaq and the S&P yesterday could make trading a little whippier as one index will likely act as a weight on the other. On top of all this, Greenspan is speaking to the Joint Economic Committee today, probably with a goal of rationalizing the 50 basis point rate cut last week. Who knows how the market will react to that? We sure don’t want to gamble. So, today will probably be a slow day for us unless we see a break of major support on the daily charts or a break of yesterday’s highs on the Nasdaq. Without either of those two conditions, there may not be any low-risk trading opportunities.
Today’s watch list:
DIA – DIAMONDS (Dow Jones Industrial Average Tracking Stock)
Trigger = 83.50 (below the two-day low)
Target = 82.40 (just above support of the 200-MA on the 60 min. chart)
Stop = 84.10 (just above yesterday’s low and whole number resistance)
Notes = As discussed above, we are not very excited about any plays going into today, but we did notice that the Dow was the weakest of the major indices yesterday and was the only one of the three indices that traded below the morning lows during the closing selloff. If there is any weakness in the market today, we expect it to be prevalent in the Dow. We’ll email you if we see any additional plays that catch our attention once the market opens.
Daily Reality Report:
We made some decent profits on QQQ yesterday, but only took half position in SPY and DIA due to the relative weakness in the S&P versus the Nasdaq. That turned out to be a good move because the S&P and Dow never went much higher, but the Nasdaq did.
Click here to read the details on how we calculate our Reality Report statistics.
“Swing” trades (per The Wagner Daily)
QQQ long –
bought 24.66, sold 24.96 (avg.), points = + 0.30, net P/L = + $164
SPY long (HALF position) –
bought 88.92, sold 89.22, points = + 0.30, net P/L = + $23
DIA long (HALF position) –
bought 84.67, sold 84.85, points = + 0.18, net P/L = + $13
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