Yesterday was another roller coaster ride in the market, but we managed it well by watching the key resistance/support levels in the indices and only making trades when either the S&P or Nasdaq futures violated those levels. As such, we avoided much of the indecision in the markets and only traded the clear moves that offered a high-probability of profit with a low potential risk. Remember that the most profitable traders are typically out of the market more than they are in the market.
Since we were short coming into yesterday morning, we lowered our stop in the overnight SPY position to just over the high of the upper channel of the downtrend from the highs of the selloff that started on Monday at 2 pm. This positioned us to realize more profits if the S&P collapsed on the open, but also caused us to lock in over a point of profit in the event the S&P reversed, which it did in the late morning session. Take a look at how we determined where to set our stop on the overnight position of SPY yesterday:
Notice the long green candle where SPY initially broke the upper channel of the downtrend, which is where we took profits on our short as well. If you look at the same chart of both DIA and SMH, you will see that we took our profits on those overnight shorts at the exact same point, which is when they both broke the upper channel of the downtrend from the previous day.
After covering our overnight short positions, we watched the market for several hours until we saw just the right opportunity present itself in the afternoon session. This occurred when SPY failed the breakout to hold the breakout above the upper channel of the secondary downtrend line from Monday morning’s highs and dropped back down below the lower channel of the uptrend that was forming intraday. This signalled a low-risk short opportunity in SPY, which is where we re-entered it short. We subsequently covered when the SPY tested the lows of the morning session, forming a double bottom. Take a look:
The Nasdaq (QQQ) and Semiconductor index (SMH) both showed relative weakness to the S&P (SPY), which is evidenced by the fact that the intraday day high on the Nasdaq was up to the low of the previous day, whereas the S&P rallied beyond the previous day’s low. That is why we shorted QQQ and SMH more aggressively than SPY. DIA was even stronger than SPY in the afternoon, which is why we did not short that index on the afternoon re-entry. Overall, it was a good trading day and every trade we entered and closed yesterday was profitable. Using trendlines such as these to determine where to take profits and when to enter trades is just fundamental technical analysis, which is what we focus on. We’ve found that the more simple and focused we keep our trading, the more profitable we are.
Going into today, it looks like head and shoulders city out there! If you did your homework, you probably noticed there are now several head and shoulders patterns all coming together at once with the S&P futures (and SPY). If these follow through to the downside, we could see some sharp selling in the index. On the other hand, if these head and shoulders patterns fail, meaning the market rallies back above the heads, then we would expect an equally strong rally. As we have been talking about for the past several days, SPY is in the process of completing the right shoulder of a h&s pattern on the daily chart (click here to see yesterday’s daily SPY chart). However, there are also two additional h&s patterns forming on a shorter time frame. One of them is forming over the past four days and the other one formed exclusively during yesterday and closed at the right shoulder. First, take a look at the h&s that formed intraday yesterday (using a 5-minute chart of SPY):
And finally, take a look at a 4-day, 30-minute chart of SPY, which shows a larger head and shoulders forming:
As you can see, that makes a total of three head and shoulders patterns that the S&P is currently in the process of completing. The last chart above clearly shows that a break of the neckline will probably result in a significant selloff in SPY. Additionally, SPY closed just a few cents above its 20-day moving average, which is an important support level. By the way, have you noticed how much better technical analysis works with the index ETFs such as SPY compared to individual stocks? That’s one of the reasons why our profits have increased since we began trading ETFs.
While SPY has the clearest head and shoulders pattern setting up, the Nasdaq and Dow charts don’t look much better. Although we never want to get too much of an opinion on what the market is going to do, we feel that a breakdown in the S&P is likely, especially once the neckline is broken over the past four days (around 89.80), and subsequently on the daily chart around 87.50. If, however, those levels are not broken, we will probably take a “wait and see” stance to trading because there is no technical reason to be long SPY right now either.
Today’s watch list:
SMH – Semiconductor Index HOLDRS
Trigger = HALF at 24.75, HALF at 24.60 (below yesterday’s low and then the low of Nov. 15)
Target = 23.45 (support of 200-MA on 60 min. chart)
Stop = 25.20 (above resistance of yesterday’s close)
Notes = SMH has also formed a head and shoulders over the past several days and a break below the low of the past four days would confirm a break of the neckline. We will leg into this short on a break below yesterday’s low and then the Nov. 15 low (the neckline).
SPY – SPYDERS (S&P 500 Index Tracking Stock)
Trigger = 89.70 (below the low of past four days)
Target = 88.35 (predicted move of h&s follow-through)
Stop = 90.40 (above yesterday’s high)
Notes = Needless to say, SPY is one of the trades we are watching for a potential short. As you probably guessed, we are looking at shorting SPY once it breaks yesterday’s lows, which is the neckline of the past four days and also a break of the 20-day MA.
Daily Reality Report:
Click here to read the details on how we calculate our Reality Report statistics.
“Swing” trades (per The Wagner Daily)
DIA short (HALF position from Nov. 18) –
shorted 85.53, covered 84.51, points = + 1.02, net P/L = + $87
SPY short (HALF position from Nov. 18) –
shorted 91.18, covered 90.08, points = + 1.10, net P/L = + $88
SMH short (half from Nov. 18 and half from Nov. 19) –
shorted 25.38 (avg.), covered 25.06 (avg.), points = + 0.32, net P/L = + $171
Intraday trades (per Intraday Updates E-mail Service)
QQQ short –
shorted 25.66, covered 25.59 (avg.), points = + 0.07, net P/L = + $23
QQQ short (afternoon re-entry) –
shorted 25.63, covered 25.44 (avg.), points = + 0.19, net P/L = + $94
SMH short (afternoon re-entry) –
shorted 25.23, covered 25.05 (avg.), points = + 0.18, net P/L = + $89
SPY short (afternoon re-entry) –
shorted 90.40, covered 90.03 (avg.), points = + 0.37, net P/L = + $56
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