We’re not afraid to admit that we were obviously wrong (or a bit early) about the markets heading lower yesterday. However, there was no harm done and no money lost because our SPY short never triggered. The key point is that the head and shoulders patterns did not confirm themselves by breaking their necklines, which we mentioned was necessary in order to short the SPY. Even if it did trigger and reverse back up, it would have been no big deal because that’s why we have stops. Yesterday’s rally in the major indices came as a surprise to many traders, including myself, who noted a multitude of technical reasons why the market was probably headed sideways or lower. The rally basically appeared out of nowhere, and occurred in the face of a weak New Housing Starts report earlier that morning. Given that the market had a lot of overhead resistance and was still in a trading range on the daily chart, we found very few technical reasons to be long yesterday, which is why stayed in cash. In hindsight, do we beat ourselves up about missing a one-day rally? Absolutely not! All we can do is trade the market the way we see it, stick to strict trigger prices to prevent sloppy entries, and use stops when we are wrong. By using this simple technique, along with being very selective about the trades we enter, we have been consistently profitable since The Wagner Daily was launched in July. Professional traders don’t worry about trading on a day-to-day basis because they have a solid method they stick to which consistently makes them money over the long-term.
On a technical basis, two of the head and shoulders patterns we discussed yesterday have now failed, leaving only the head and shoulders on the daily chart (with the head at the high of Nov. 6). Since the h&s pattern typically follows through over 70% of the time, the failure of the pattern to follow-through yesterday by rallying back up above the head, without breaking the neckline is very bullish. Additionally, the market rallied in the face of bad fundamental news yesterday, which is also a bullish indicator. Strength was most prevalent in the Nasdaq (and the Semis), although the S&P and Dow were also strong. The fact that all the major indices closed at their respective intraday highs was certainly a bullish sign because the trend over the past few days has been selling into strength, which has typically been causing the market to close near the lows each day it attempted to rally. Though the rally was certainly impressive, the major indices are still technically in a trading range as of yesterday’s close and have not yet broken out. However, the pre-market Nasdaq futures are currently trading above the key resistance level of 1079.50, which would represent a break of the double top from earlier in November (if the breakout holds). It’s interesting to note that the Nasdaq Composite (COMPX) is now testing the resistance level of 1426 for the fourth time this year. Take a look at this key level:
A convincing break of the 1426 level will give us a clear buy signal in the Nasdaq, with the next major resistance being the 200-day MA around 1500. The S&P and Dow have broken their resistance levels of the Nov. 18 highs, but still have a bit of resistance from the highs of November 6, which is still the head of the head and shoulders pattern on the daily chart. However, if this level is broken and holds, along with the Nasdaq breaking out, our buy signals would be clear based on the breakouts across the board. But, if the S&P and Dow fail to break their November 6 highs, remember that the market is still technically in a trading range. We don’t care if the market breaks out or not because we will either trade the breakout on the long side or short the breakdown if the rally fails. It’s just those darn sideways trading ranges that take away all our fun!
Today’s watch list:
BBH – Biotechnology Index HOLDRS
Trigger = 90.12 (above price resistance on the daily chart)
Target = 93.00 (resistance of high of August 22)
Stop = 88.70 (below support of yesterday’s close)
Notes = The Biotechnology Index (and BBH) has been consolidating in a trading range for over a month, has tried to breakout several times since then, and is now poised to breakout. Even though the last several attempts to break 90 failed, each subsequent attempt increases the odds of the breakout following through. In addition, a breakout in the Nasdaq will only serve to increase the odds. Once BBH breaks 90, there is minor resistance of the high of November 5 around 91, but that is only one day of resistance. Next stop would be the high of Aug. 22.
QQQ – Nasdaq 100 Index Tracking Stock
Trigger = 26.85 (above price resistance on the daily chart)
Target = 28.10 (just below the 200-day moving average)
Stop = 26.33 (below support of yesterday afternoon’s swing low)
Notes = This is a simple breakout play as discussed in the commentary above. Remember the opening gap rules.
Daily Reality Report:
The only trade we entered yesterday was PPH short, which was intended to be an intraday trade. Also, several of you emailed us and said your broker did not have any shares of PPH available to short. However, we did not have any problems getting shares of PPH from our broker to short. So, feel free to e-mail us if you would like some information on our broker (who also charges us only 1.5 cents per share).
Neither our SMH or SPY shorts triggered (obviously).
Click here to read the details on how we calculate our Reality Report statistics.
“Swing” trades (per The Wagner Daily)
Intraday trades (per Intraday Updates E-mail Service)
PPH short –
shorted 77.75, covered 78.20, points = (0.45), net P/L = ($93)
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