Commentary:
Wow! Talk about a roller coaster ride! Yesterday began with a small gap down in the S&P, a selloff to break the lows of the week, a sudden news-driven reversal that tested the previous day’s HIGHS, a selloff back down to test the morning lows, and a rally into the final hour that caused the S&P index to close nearly flat from the previous day’s close. The Nasdaq followed suit, but was once again stronger than the S&P index during the whole day. This was evidenced by the fact that the Nasdaq broke the previous day’s highs during the rally when the S&P only tested it. In addition, the Nasdaq did not sell off all the way back down to the morning lows, and it also recovered at a better percentage into the close which allowed the Nasdaq to close with a decent gain on the day.
Looking at a 15 minute chart of SPY yesterday, notice how the 20 and 40-period moving averages kept crossing each other in a sideways motion. This confirmed the lack of direction. While there are other indicators that traders can use for trading in these kinds of conditions, we prefer to keep it simple by aggressively participating in the trending days and keeping it light on range-bound days:
As we discussed in Wednesday’s morning report, the major market indices were already poised to open in “no-man’s land” yesterday, which prepared us for whippy price action. When you combine Greenspan’s speech to the Joint House Committee with the Iraq news that was unexpectedly released (allowing UN weapons inspectors into the country again), it really threw the market for a loop as traders participated in a tug-of-war and tried to figure out whether the market should go higher or lower on that news.
After getting stopped out of our DIA short on the sharp morning reversal, we decided the most profitable thing to do was nothing unless the S&P broke the previous day’s highs or set a new intraday low, neither of which happened. On days like yesterday, we prefer to let other traders fight it out and we’ll take a spectator’s seat ringside because it’s much safer than actually being in the ring (especially for a tall skinny guy like me). However, once the winner is established, we will more aggressively go along for the ride in whichever direction the market goes.
The good news is that volume was decent yesterday and has been steadily increasing for the past three days, especially in the Nasdaq. This should aid in some type of trend becoming established soon, though the major market indices appear as if they could once again chop around in a sideways range today. Since the Nasdaq has been showing relative strength the past couple of days, we’ll continue to keep an eye on QQQ to the upside, especially if it breaks the high of the week around 25.50. On the downside, the Dow and S&P have been among the weakest indices, so we’ll be watching SPY and DIA for breaks of their respective lows of the week.
Regardless of what happens today, it is important to realize that the market is at a very critical point here on the daily charts. Although still basing at support, the indices are very close to breaking support of the uptrend that has been intact since October 10. A break of yesterday’s lows is likely to spur some pretty sharp selling momentum that would probably take the major indices down to their 50-day moving averages. However, a rally during the next couple days is likely to give hope to traders that the “mini-bull market” is still in effect. One final scenario is to remember that sideways consolidation near the highs is known as a correction by time (rather than price) and is also bullish. So, let’s be careful here until the market figures out its next move.
Today’s watch list:
OIH – Oil Service Index HOLDRS
Long
Trigger = 53.15 (above yesterday afternoon’s price resistance)
Target = 54.43 (just below the upper channel resistance of the trendline from the high of Nov. 7; also the 20-MA on 60 min. chart)
Stop = 52.50 (below yesterday’s close)
Notes = This play was initially pointed out to us by one of our subscribers who participated in our 1-on-1 Private Trader Coaching program last month. After he e-mailed us the idea last night, we studied the charts and agreed that it is a good potential trade. Whether the trade works out or not, kudos to Steve for doing his homework and applying what he has learned!
If it wasn’t for the Iraq news that caused a knee-jerk selloff reaction to oil stocks, this index probably would have reversed yesterday after coming down to the lower channel support of the uptrend from the low of October 10. However, despite the fact that tensions over Iraq are perceived to be easing, this index is due for a technical bounce. It has bounced off of support of its 50-day MA and is now on support of its 20-week MA. In addition, we like the high “capitulation” volume yesterday which often signals a temporary end to a selloff. Finally, we liked the reversal attempt into the final hour of trading, which often signals what is to come the next morning. We will look to buy on a confirmation of the reversal, which is not to be confused with “bottom-fishing.”
BBH – Biotechnology Index HOLDRS
Short
Trigger = HALF at 84.45, HALF at 84.20 (below the low price support of the past MONTH)
Target = 82.30 (next major price support on the daily chart; will probably probe just below the 50-day MA)
Stop = 85.50 (above resistance of yesterday’s close)
Notes = The Biotech Index ($BTK.X) is on the verge of losing support on the daily chart, and BBH will go along with it. Yesterday, BBH probed just below the price support of 84.50, but recovered. We’re thinking that the next test will result in a breakdown of support because that price level has been tested about five times within the past month and broad market conditions are now technically getting worse too.
If you have never traded this ETF before, be aware that it is volatile and often has big spreads. As such, simply adjust your position size appropriately to manage risk. We are also legging into the position as noted above.
Daily Reality Report:
Our only trade yesterday was the DIA short which triggered and looked good early in the morning. However, we quickly got stopped out when the news of Iraq’s acceptance of weapons inspection was released. Fortunately, we had a physical stop in place which enabled us to cover very close to our stop price of 84.10. Because the move was so fast, we would have undoubtedly received a worse fill if we manually were trying to cover the short.
Click here to read the details on how we calculate our Reality Report statistics.
“Swing” trades (per The Wagner Daily)
Closed Positions:
-
DIA long –
shorted 83.47, stopped out 84.11, points = (0.64), net P/L = ($120)
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