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The Wagner Daily


Commentary:

In the last issue of The Wagner Daily, we mentioned that Friday was likely to be a correction day, either by time or price. It turned out to be a day of correction by time where the major market indices traded sideways in a tight range near the highs. This is typically considered to be more bullish than a correction by price. Even though the market tried to break out a few times on Friday, notice how the market quickly sold off every time it attempted to break the previous day’s high, especially into the close. The lack of follow-through that we anticipated on Friday is why we chose not to enter any new positions and instead simply manage our open position we had in BBH, which held up pretty well.

Whether the market consolidates another day or two and goes higher is difficult to determine, but we certainly feel more comfortable buying a breakout from current price levels rather than before the market corrected for a day because some of the moving averages on the intraday charts have now risen to provide some minor price support that could help sustain a rally. This makes the play for today pretty simple — buy breakouts of any 2-day highs in the major indices. However, it is important to not get too caught up in assuming the market will ever break the 2-day highs. In fact, the odds of a breakout above Friday’s highs are greatly reduced if it does not occur within the first hour of trading today. A failure to set new highs in the morning session also increases the odds of breaking Friday’s lows, which would generate some potential short plays. Of course, one final scenairo is that the market chops around in a trading range again today, in which case we will remain in cash and wait for something to happen. Let’s take a look at where the next support and resistance levels are in each of the three major indices we follow:

Even though the Nasdaq could easily breakout above last week’s highs, the one thing that concerns us a bit is its proximity to the 200-day moving average, which is currently at 28.09 for QQQ (1128 for the Nasdaq 100 Index). This means that even if the Nasdaq breaks its highs from last week, there is not a whole lot of room for the index to rally before running into significant resistance of the 200-day MA, a very powerful support/resistance level because it is so widely followed by many traders and investors alike. The last time the Nasdaq 100 rallied into its 200 day moving average was in the beginning of March 2002, where it stayed for only two days before heading south to set new lows again.

If the Nasdaq fails to breakout and sees selling pressure, the first support is Friday’s low of 27.32 for QQQ (1100 for the Nasdaq futures). Below that, the next support is at the 26.77 area for QQQ (1077 for the Nasdaq futures). If Friday’s lows are broken and we sell short, this price level is a good place to cover because former resistance levels become the new support levels. In fact, a selloff down to the 1077 area would also represent a low-risk point of entry for swing trades on the long side. Here is a look at SPY and DIA:

For both SPY and DIA, the next price resistance is the highs of August 27. This equates to a price of 96.25 for SPY (956.50 for the S&P Futures) and 89.99 for DIA (9017 for the Dow). If SPY breaks below Friday’s low and we sell short, the next price support is at the high of November 20, which is 92.42 (919 for the S&P futures). For DIA, the next support level below Friday’s low is 86.97 (86.43 on the Dow Jones). Again, these support levels simply represent the former breakout levels that acted as resistance.

Given the Thanksgiving holiday on Thursday, we expect the week ahead to be pretty slow overall. The market is closed Thursday and is closes at 1 pm EST on Friday. We really don’t anticipate a huge breakout, but we do not expect the market to collapse either. Swing trades may be a bit difficult this week if we stay in the trading range, but we will look for low-risk intraday trading opportunities. There is also a slew of economic reports due out this week, especially Wednesday which has 9 different reports scheduled to released.



Today’s watch list:


IWM – iShares Russell 2000 Index Tracking Fund

Long

Trigger = 80.30 (above the high of Friday, Nov. 22)

Target = 81.75 (resistance of the high of Aug. 27)

Stop = 79.60 (below the lower channel support of the uptrend from the low of Nov. 20)

Notes = On Friday, notice how IWM was one of the few indexes that actually closed above the previous day’s high and closed on its intraday highs as well. This indicates that the index had relative strength on Friday, which is likely to continue today on any broad strength in the market because it closed above its resistance of 80 on Friday. We also like the increasing volume of the past few days. In addition, this is the time of year when we historically see money flow into mid-cap stocks, which is what the Russell 2000 tracks.

Even if IWM does NOT gap above its trigger price, we will not be looking to buy during the first 30 minutes because we want to make sure the rally is confirmed by staying above Friday’s highs after the first 30 minutes of trading. If the trigger price of IWM is confirmed after 30 minutes, we will look to enter if the rest of the market internals look decent.



SMH – Semiconductor Index HOLDRS

Short

Trigger = HALF at 28.18, HALF at 27.90 (half below the swing low of Friday afternoon, add on break of Friday’s low)

Target = 27.20 (support of the low of Nov. 21; gap will likely provide support)

Stop = 28.60 (above the 20-MA on the 15 min. chart)

Notes = The SOX index may be forming a double top from the highs of August 19 – 22. However, we want to wait for confirmation before shorting, which would occur with a break of Friday’s close and then the intraday low.


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:

    BBH long (from Nov. 21) –

    bought 90.30, sold 91.10, points = + 0.80, net P/L = + $128

Open Positions:

    (none)

Intraday trades (per Intraday Updates E-mail Service)

    (none)

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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