After probing above last week’s highs in the major indices yesterday morning, the market was quickly reigned back into the trading range, where selling pressure took over and caused the S&P and Dow to break below the low of the previous day. While this presented us with profitable shorting opportunities in SPY and DIA, the selloff was short-lived as the market unconvincingly recovered in the afternoon session, causing us to give back some profits. The Nasdaq also sold off yesterday morning, but it once again maintained relative strength and never dropped below the previous days lows, although it did fail to sustain the morning breakout.
The most notable thing about the Nasdaq futures (and QQQ) is that it briefly broke above its 200-day moving average, but came right back down and closed just below it. The 200-day moving average is a very important level of any index and is closely watched by investors and traders alike. Therefore, it’s important to keep an eye on how the Nasdaq reacts over the next couple of days now that it has rallied into this resistance level. The last time QQQ rallied up to its 200-day moving average was in March of 2002, where it only stayed for two days before getting whacked over the next few months to set new multi-year lows. We’ll see if this time is different or not. Take a look:
The afternoon rally in the indices was interesting because the market rallied back above the previous break of support from the morning session without encountering much resistance. Since a break of the previous day’s low is typically an important support level that becomes the new resistance level, we were a bit surprised that the market did not have more trouble getting back above that new resistance, especially given the lack of momentum in the afternoon rally. The market internals showed a rally without much conviction yesterday that sort of just drifted higher before once again running into sellers during the final minutes of the trading day. Perhaps most significant is that the market set a lower high yesterday afternoon by failing to break above the morning highs and also dropped a good bit in after-hours trading from 4:00 pm to 4:15 pm.
Though we were hoping for follow-through to yesterday’s morning selloff, we really were not too surprised by the listless market action. The market remains in a three-day trading range, and there is a good chance it will continue to do so until after Thanksgiving. As we mentioned yesterday morning, we really don’t expect a whole lot to happen during the remainder of the shortened pre-holiday week. Remember that there are also a bunch of economic reports that will be released tomorrow morning. We will continue to watch for a convincing breakout to new highs or a breakdown of the lows, but we may have a tough time getting volume to confirm any sort of significant move. So, we’re prepared to be mostly in cash this week unless the market gives us a good reason not to be. There’s not a whole lot more to say about the state of the market right now without being overly verbose, so let’s see if the market can muster up any excitement today.
Today’s watch list:
SMH – Semiconductor Index HOLDRS
Trigger = 28.90 (below the lower-channel support of the 4-day uptrend; also below the 20 and 40 MAs on 15 min. chart)
Target = 27.20 (support of the low of Nov. 21; gap will likely provide support)
Stop = 29.47 (above resistance of yesterday’s close)
Notes = This setup from yesterday did not trigger, but we like the trade even better today because now the risk/reward ratio is even higher. The primary key as to whether this trade works or not will be watching how the Nasdaq handles the 200-day moving average that it is stuck against. If the Nasdaq breaks out of consolidation and sets new highs, this trade will probably not trigger. But if the Nasdaq comes in today, we expect the SOX to be met with selling pressure.
SPY – SPYDERS (S&P 500 Index Tracking Stock)
Trigger = 94.30 (breakout above the 3-day high)
Target = 96.25 (resistance of the high of Aug. 27)
Stop = 93.70 (below support of yesterday’s close)
Notes = Though we don’t really expect a breakout today, we want to be prepared on both sides of the market. We are watching SPY on the long side if the market does break out because, unlike the Nasdaq, the 200-day moving average is still far overhead for the S&P. Therefore, a breakout in the broad market would probably involve sector rotation out of the tech stocks and the Nasdaq and back into the S&P, thereby fueling a SPY rally. However, there is a lot of resistance SPY has to get through first, especially given the pre-market weakness.
Daily Reality Report:
As we mentioned in an email alert yesterday, we did not enter IWM in the morning session even though it triggered because we had doubts about the ability of the market to sustain a breakout. Given the morning selloff, it turned out to be a wise move. However, if you did buy IWM and used a trailing stop, you probably still made a bit of profit. Nevertheless, we will not count it as a profitable trade in our statistics because we never entered it.
We also shorted SPY and DIA yesterday morning and covered half of the positions with approximately 60 – 70 cents profit on each one. However, we then re-entered on a bounce and got stopped out in the afternoon, making the day uneventful but slightly profitable.
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)
SPY short –
shorted 93.66, covered 93.35 (avg.), points = + 0.31, net P/L = + $45
SPY short (HALF position on the re-entry) –
shorted 93.45, covered 93.67, points = (0.22), net P/L = ($20)
DIA short –
shorted 88.53, covered 88.26 (avg.), points = + 0.27, net P/L = + $41
DIA short (HALF position on the re-entry) –
shorted 88.25, covered 88.54 (avg.), points = (0.29), net P/L = ($27)
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