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The Wagner Daily


Commentary:

After the Nasdaq gapped a few points above its highs of the month and the highest level seen since June, the gap quickly faded, led by weakness in the S&P and Dow, both of which were unable to rally beyond their overhead resistance from the beginning of November. It was a tricky day to be either long OR short yesterday because the market gapped up above Friday’s highs, sold off steadily in the morning, reversed the selloff around noon, rallied back to the upper third of the intraday range (especially on the Nasdaq), and ultimately sold off again at 2:00 pm, setting new lows of the day. There was money to be made on both of sides of the market yesterday, but the bears ultimately won by the end of the day. In fact, the Nasdaq was much weaker than the S&P by the end of the day, with the Semis totally reversing off of earlier gains. Undoubtedly, there are also a lot of bulls who bought and are now trapped near the highs of yesterday. Fortunately, our opening gap rules kept us out of trouble once again and prevented us from buying QQQ and DIA at the highs of the day, although we did take a loss on our OIH long yesterday morning. We made back most of our OIH losses by catching DIA and SPY short on two separate occasions yesterday, especially on the selloff into the close.

Yesterday’s selloff and subsequent closing prices near the intraday lows after a gap above Friday’s highs was very bearish and resulted in some interesting technical factors taking place in each of the three major indices we follow (QQQ, SPY, and DIA). Let’s take a look at each of these three indices:

Most interestingly is that the Nasdaq (and the SOX index) formed a quadruple top on the daily charts by failing to break its former highs from November 6 and resistance from July 17 and August 22. This is best illustrated by looking at a daily chart of the Nasdaq Composite (COMPX) below:

Notice how the COMPX has failed to break the 1426 level on FOUR separate occasions since July. This has been a key resistance point that we need to continue watching. A break above that level would make it nearly a no-brainer to buy, but the market internals are not confirming the move and neither is the S&P or Dow.

The S&P futures (and SPY) failed to break above the high of November 6, which we have been talking about as an important resistance level that represented the head of a head and shoulders pattern on the daily chart. As we have been discussing, a failure to break that price level means the h&s pattern is still in effect. Confirmation of the h&s pattern following through would be another selloff back down to, and a subsequent break below, the neckline (around 87.50 on SPY). So, while the S&P still has a ways to go before testing the neckline again, keep an eye on that key level, illustrated below:

The Dow Jones Industrial Average (and DIA) has a similar head and shoulders pattern to the S&P, however the Dow is looking technically worse than the S&P because of its proximity to the 20-day moving average. Notice how the Dow closed within a few points of its 20-day moving average. This is an important level that is closely followed by market technicians. Since October 14, there have only been three days where the Dow traded below its 20-day moving average and that level acted as support on all the other occasions. However, if the Dow gets back below the 20-day MA, it would mean that the November 14 breakout back above that level has failed. We expect strong selling to hit the Dow if it drops below its 20-day moving average again, so watch that level on DIA, which is currently at exactly 85.00. Take a look:



Today’s watch list:


SMH – Semiconductor Index HOLDRS

Short

Trigger = below 25.45 OR on a rally up to 25.70 (below yesterday’s low OR into resistance from the highs of Nov. 14 and 15)

Target = 24.55 (support of the 200-MA on the 15 min. chart, the 100-day MA, and the low of Nov. 15)

Stop = 26.07 (above resistance of the lower channel of the 4-day uptrend that was broken yesterday; also whole number resistance)

Notes = The SOX index, which started out strong yesterday, looks pretty bad on the daily chart and has formed a “gravestone doji” candlestick formation after the rally failed yesterday and it closed on the lows. Additionally, the 4-day uptrend was broken yesterday, as was the 20-MA on the 60-minute chart. We entered a HALF position of SMH short a few minute before the close yesterday, so this will be the second HALF of the position.



DIA – DIAMONDS (Dow Jones Industrial Average Tracking Stock)

Short

Trigger = 84.60 (below the lower channel support of the lows of Oct. 10, also the lows of Nov. 15)

Target = 83.20 (support of the low of Nov. 13)

Stop = 85.30 (above the lower channel resistance of the lows of Oct. 10)

Notes = We are looking to add to our DIA short on a break of the 20-day MA, which also represents a break of the uptrend that has been in place since Oct. 10. Since we are already short a HALF position of DIA from overnight, this would be an additional HALF we will add to the position if it triggers.

Daily Reality Report:

Click here to read the details on how we calculate our Reality Report statistics.

“Swing” trades (per The Wagner Daily)

Closed Positions:

    OIH long –
    bought 55.78 (avg.), sold at 54.85 (avg.), points = (0.93), net P/L = ($258)

Open Positions:

    DIA short (HALF position from Nov. 18) –
    shorted 85.53, will set new stop after open, open points = + 0.62, open net P/L = + $52

    SPY short (HALF position from Nov. 18) –
    shorted 91.18, will set new stop after open, open points = + 0.70, open net P/L = + $55

    SMH short (HALF position from Nov. 18) –
    shorted 25.55, will set new stop after open, open points = + 0.10, open net P/L = + $21

Intraday trades (per Intraday Updates E-mail Service)

    DIA short –
    shorted 85.67, covered 85.51 (avg.), points = + 0.16, net P/L = + $23

    SPY short –
    shorted 91.38, covered 91.17 (avg.), points = + 0.21, net P/L = + $30

    DIA short (re-entry; covered HALF and took HALF overnight)
    shorted 85.53, covered 85.07, points = + 0.46, net P/L = + $38

    SPY short (re-entry; covered HALF and took HALF overnight)
    shorted 91.18, covered 90.54, points = + 0.64, net P/L = + $50


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

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