From a purely technical point of view, yesterday’s breakout in the major indices was very important because it confirmed the shift of the balance of power to the side of the bulls (at least in the short term). All three major indices we follow (the Dow, Nasdaq, and S&P) broke out of their trading ranges that they have been stuck in for more than three weeks. Generally speaking, this lowers the risk of entering new long positions because the trading range that we broke out of yesterday should now act as support if the market comes back down. We certainly feel more comfortable being long now than we did during the rally two days ago because the market was still in a trading range at that point.
All the major market internals were strong yesterday including a 2:1 advance/decline ratio, positive market breadth, and strong volume. In our opinion, the most important factor about yesterday’s breakout was the high volume. The NYSE traded just over 2 billion shares and the Nasdaq traded just over 2.4 billion shares, which marked the highest volume day in the Nasdaq since July 24. This strong volume was expected because if the market broke out, every technical trader in the world was watching and waiting to buy a breakout of the key 1426 level in the COMPX that we discussed yesterday. The breakout in the markets yesterday, especially the Nasdaq, triggered a lot of buy orders. By the way, take a look at how we chart the total volume in the market because it makes it easy to compare volume of any given day. This is a daily chart of the Nasdaq volume:
We would be surprised if the rally of the past two days continues into today without some kind of correction first. This means that trading today is likely to be choppy, which is not conducive to our style of trading. Keep in mind that the Nasdaq futures have rallied over 8% in the past two days (nearly 100 points), while the S&P futures have rallied over 5% during the same period, all without any type of correction. Remember that technical corrections of strong rallies take place in one of two ways — either by price or time. A correction by price is simply a retracement (pullback) off of the highs down to a support level before going back up and continuing the uptrend. Price corrections typically bring market prices back down to key moving averages which offer price support and a lower-risk point of entry on the long side. On the other hand, a correction by time means that rather than the price of the market selling off to meet its moving averages below, the market trades sideways in a relatively tight trading range for a period of time which subsequently causes the moving averages to rise up to the current price of the market without any type of price correction. The longer that the price consolidates near the highs, the more of a solid base the market is building from which to break out of and go higher. Of the two types of correction, a correction by time is more bullish than a correction by price because it indicates that there are very few bulls taking profits and that the market is only taking a break due to a temporary lack of buyers.
Overall, we certainly view yesterday’s breakout as a technically bullish signal which will probably propel the Nasdaq composite up to its 200-day moving average, which is just over 1500 (around $28 for QQQ). The next major resistance level on the S&P futures is the high of August 22, around 965 ($97 for SPY). For the Dow, the next resistance point is just over 9000 ($91 for DIA). Given the current positive market sentiment and seasonal buying in December, we would not be surprised to see these indices hit their respective resistance levels by the end of the year. However, once the seasonal hoopla dies down and the reality of unchanged fundamentals sets in, this trader thinks that the market, especially the Dow, is headed back down to test the October lows. But, this could easily take another six months to a year before we see that happen (look for our long-term analysis of the Dow in the next issue of The Wagner Weekly). In the meantime, we’ll continue to trade the short term trends, whichever way they may go.
Today’s watch list:
We had a few short plays in mind that had profit targets of about 50 cents (down to moving average support). However, the pre-market gap down has rendered these plays invalid. On the other hand, we would consider buying the indexes again if they break yesterday’s highs on decent volume, but we don’t want to list those plays because we want to assess overall market conditions first. Therefore, we will just focus on managing our open position in BBH from overnight and will send an email alert if we spot any other intraday trading opportunities.
Daily Reality Report:
Our trade to buy QQQ yesterday was pretty much a “no-brainer,” so we can’t take much credit for that. However, we managed the trade well in order to realize maximum profits with minimal risk. We did this by not buying the Qs until the gap up confirmed itself by setting a new high after the first 20 minutes of trading, taking profits on half of the position before the mid-day pullback, buying the other half 20 cents lower on the pullback, and then selling the whole position near the highs.
We also bought BBH yesterday and took it overnight. Though it did not show a lot of relative strength for most of the day, we saw buyers rotate out of the tech stocks and into the Biotechs going into the final thirty minutes of trading. We expect this to continue today because yesterday was the first breakout day for BBH and if money comes out of the semis, it will probably go into the biotechs.
Click here to read the details on how we calculate our Reality Report statistics.
“Swing” trades (per The Wagner Daily)
QQQ long –
bought 27.17, sold 27.73 (avg.), points = + 0.56, net P/L = + $293
QQQ long (HALF position on re-entry)-
bought 27.49, sold 27.66, points = + 0.17, net P/L = + $38
BBH long (from Nov. 21) –
bought 90.30, raised stop to 89.50, target still around 93, open points = + 0.79, open net P/L = + $126
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