Interestingly, Friday’s closing price of the S&P futures was nearly exactly equal to the high of October 28, which is 908.70 (91.29 for SPY). As you may recall from Friday’s issue of The Wagner Daily, that price level of 908.70 represents the high of the left shoulder of a head and shoulders pattern that has been forming on the daily chart, and is therefore a key resistance level that the S&P needs to get past. Although a break of that level does not mean the head and shoulders pattern has failed, it increases the odds that the S&P will at least test resistance of the high of November 6 (the head), which is 926.50 (93.07 for SPY). If that level is broken, the head and shoulders pattern will have failed, meaning that the predicted rally is equivalent to the distance from the top of the head to the neckline. Notice also how the 20-day moving average is acting as support for SPY. Take a look at the chart below that illustrates this:
For SPY, that represents a predicted rally of approximately 5.5 points IF the high price of November 6 is broken. This translates into a price of approximately 98.5 for SPY, which is just below the 200-day moving average and also the 40-week moving average. Both of those moving averages will likely serve as strong resistance, but they are pretty far away at this point.
The Nasdaq has been showing more relative strength than the S&P on the daily charts, but it was actually weaker than the S&P on Friday because SPY broke above the previous day’s highs, but the Nasdaq did not. Nevertheless, QQQ is close to a big breakout on the daily chart and does not have the same overhead resistance of the head and shoulders pattern that the S&P does. A breakout in the Nasdaq will increase the odds of the S&P breaking out too because the Nasdaq often leads the broad market.
We remain cautious until that key resistance level of November 6 is broken on SPY, but a break above the high of October 28 today certainly adds to the bullish argument. While we’re not real excited about buying the market at current levels, a break above the highs of November 6 would actually increase the likelihood of profitable trades because the market would have broken resistance from earlier this month. Therefore, let’s keep an eye on that level because we will plan on getting long if that resistance level is broken and holds.
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 = 85.60 (below support of yesterday’s close)
Notes = This trade was on our watchlist Friday and it did not trigger. However, Friday’s closing price put the Dow closer to breaking out, making it more likely to trigger today. Volume has been decreasing the past few days, but that is normal during consolidation periods. 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. Volume should pick up once DIA trades above 86, which will also confirm the breakout. If the breakout fails, we will be getting right back out, hence the tight stop. Remember the gap rules.
QQQ – Nasdaq-100 Index Tracking Stock
Trigger = 26.70 (breakout of resistance on the daily chart)
Target = 28.10 (resistance of the 40-week moving average)
Stop = 26.15 (below support of the close of November 15)
Notes = This is simply a breakout play, but remember the gap rules. We want the breakout to confirm itself before we buy today because there is a good chance the Nasdaq will simply probe above its resistance and consolidate for a few days before going higher.
OIH – Oil Service Index HOLDRS
Trigger = 55.50 (above resistance of the 3-day high; also the 200-MA on the 15 min.)
Target = 56.70 (price resistance – high of Oct. 24)
Stop = 54.90 (below support of breakout point)
Notes = We caught the first reversal day of OIH last week, took it overnight, and profited nicely from it. It appears, however, that OIH is poised to make another leg higher, so we are once again watching for an entry in this ETF. We are looking at buying on a break of the 3-day high, which will probably push OIH up to test its highs of Oct. 24. Remember the gap rules.
Daily Reality Report:
Friday was a very slow and flat day until the final hour, which we did not participate in due to the expected volatility of Options Expiration and our rule to be done trading before the 3:30 pm reversal period. Our DIA long did not trigger and OIH hit our trailing stop on the open.
Click here to read the details on how we calculate our Reality Report statistics.
“Swing” trades (per The Wagner Daily)
OIH long (HALF position from Nov. 14) –
bought 54.05 (avg.), trailing stop hit at 54.87, points = + 0.82, net P/L = + $110
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