The markets began the day yesterday with a 1% opening gap up on the heels of a positive retail sales report for October. After fumbling around a bit for the first thirty minutes, the gap held, the market stabilized, and began to rally. Although the Nasdaq initially started the day with a bit of weakness, it quickly recovered and established a solid uptrend for the remainder of the day. The divergence between the S&P and Nasdaq was obvious because the Nasdaq continually set higher highs and higher lows from the morning through the close, while the S&P remained in a sideways trading range for the entire morning session before eventually breaking out of the range in the afternoon.
One factor that made going long the indexes yesterday a bit challenging was the narrow range of the rally, especially in the S&P futures. In fact, the S&P basically stayed in a 10 point range the entire day, despite the rally. This translated to a range of only one point on the SPY, whereas the SPY usually trades in a range of 2 – 3 points. Though the Qs rallied a bit more relative to SPY, the range in QQQ after breaking the opening highs was only about 40 cents. A good portion of any potential profit on the long side yesterday was to be made from the opening gap up. The narrow range intraday is why we did not aggressively pursue long entries in SPY, QQQ, or DIA. Instead, we chose to focus on proactively managing our OIH long position, which showed relative strength to the broad market the entire day. Unlike the indexes, OIH had a relatively wide trading range yesterday which enabled us to lock in some solid gains. Trading OIH may not be as glamorous or exciting as trading QQQ, but our goal is to make consistent profit in the markets, regardless of which ETFs we profit from.
Although QQQ is looking pretty decent on the daily chart now, SPY now lies in a precarious position because yesterday’s rally put the S&P back above its 20-day moving average and above the highs of the prior three days (which is bullish). However, SPY is now setting up as a potential head and shoulders pattern with the left shoulder being formed from the highs of the end of October. Take a look at the chart below:
Going into today, a key level to watch in the S&P futures is the high of October 28, which is 908.70 (91.29 on SPY). This is an important resistance level because if we break it, SPY will have a good shot at testing the high of the month, which is 93.07 and occurred on November 6. However, the head and shoulders pattern is still in effect and cannot be declared as “failed” until that high of November 6 (the head) is broken. Therefore, we need to be cognizant of the potential head and shoulders pattern in order to prevent getting caught in a major reversal back to the downside. Though the Nasdaq looks better, it is unlikely that the Nasdaq goes anywhere without the S&P. Also be aware that today is Option Expiration day, which often causes erratic price movement in stocks during the final hours of trading. In summary, I guess you could say we are cautiously optimistic over the next couple of days, but only if SPY breaks the high of October 28 first.
Today’s watch list:
DIA – DIAMONDS (Dow Jones Industrial Average Tracking Stock)
Trigger = 86.05 (above price resistance on the daily chart)
Target = 87.00 (a few cents above the high of November 8)
Stop = 85.65 (below support of yesterday’s close)
Notes = We’re not terribly excited about this trade, but it is probably low risk and could yield a decent profit if it triggers. Essentially, we are simply looking to buy a breakout of resistance at the 86 level, which should generate a point or so to the upside. If the breakout fails, we will be getting right back out; hence the tight stop.
Daily Reality Report:
OIH worked out great yesterday and we managed it well. We bought a half position once the opening gap stabilized, added to it when it broke the highs, sold half when it hit our initial price target, re-entered on a Fibonacci retracement to support, sold another half into a subsequent new high, and took the remaining half overnight in anticipation of a gap-up today. It worked out to be a profitable trade with minimum risk based on the way we managed it. BBH never triggered.
Click here to read the details on how we calculate our Reality Report statistics.
“Swing” trades (per The Wagner Daily)
OIH long –
bought 53.76 (avg.), sold 54.57 (avg.), points = + 0.81, net P/L = + $218
OIH long (HALF position remaining open from Nov. 14) –
bought 54.05 (avg.), stop raised to 54.90, open points = + 1.32, open net P/L = + $179
Intraday trades (per Intraday Updates E-mail Service)
SPY long (HALF position) –
bought 90.24, sold 90.03, points = (0.21), net P/L = ($20)
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