The market broke down below the three-day trading range yesterday by beginning with a gap down below the 20-MA on the 15 minute chart of both the Nasdaq and the S&P futures. Though both indices tested the 20-MA into the 10:00 AM reversal period, neither of them were able to sustain a rally above that level, which subsequently set off selling to break the lows of the opening gap down. Though both indices were weak the entire day, selling was more prevalent in the Nasdaq than the S&P because of sector rotation out of the tech stocks and into some of the “old economy” sectors such as Paper, Gold, and Cyclicals. The overhead resistance of the powerful 200-day moving average we have been following with the Nasdaq and QQQ also aided in causing further weakness when the Nasdaq was unable to break through that level on its first attempt. This is why we chose to short SMH and QQQ rather than SPY and DIA, both of which initially acted a bit stronger than the Nasdaq and did not have the 200-day MA as overhead resistance.
Once both indices broke the previous day’s lows, they never looked back and entered into a steady downtrend that lasted all the way through the close. A steadily trending day like yesterday was perfect for using trailing stops because the downtrend was so steady that it enabled you to continually lower your stop to just above the upper channel resistance of the downtrend line. A quick look at a 15 minute chart of QQQ shows this trendline:
Notice also how the bounce during the mid-day doldrums was on very light volume. This confirmed that buyers were scarce yesterday and selling was likely to resume later in the day. You will also notice the 200-period MA on the 15 minute chart that acted as support going into the final hour of trading, which is why we covered our shorts around the 2:30 PM reversal period.
Since today is the day before Thanksgiving, we expect many traders to close up shop early today as they head out of town for the holiday. We expect afternoon trading to be dull and the volume to be very low, but there may be a few hours of good trading in the morning session due to several economic reports scheduled to be released at various times this morning. The biggest reports due out today are jobless claims, durable goods, and personal income/spending, all due at 8:30 AM EST and the Michigan sentiment reading which is due out at 9:45 AM EST. The markets are obviously closed tomorrow, but are open until 1:00 PM EST on Friday. There will be no Wagner Daily tomorrow, but publication will resume on Friday morning.
Finally, we want to remind everyone that our new ETF Real-Time Room will be launched this Monday, December 2. If you are a monthly or trial subscriber to The Wagner Daily, you will automatically be receiving login instructions for your free one-month trial over the weekend, meaning it is not necessary for you to manually sign up. Have a fun and safe holiday everyone!
Today’s watch list:
SMH – Semiconductor Index HOLDRS
Trigger = any price ABOVE 28.45 (resistance of upper channel of downtrend line of past two days)
Target = 27.20 (support of the low of Nov. 21; gap will likely provide support)
Stop = 29.05 (above yesterday’s swing high resistance of 29.00)
Notes = We think the Semis still have a good bit of room to drop, despite yesterday’s selloff. Since we are looking to short into a rally or gap-up, this is considered a “fade” trade because we are selling short into strength, thereby increasing the risk/reward ratio. We still expect a test of the Nov. 21 lows.
Daily Reality Report:
Click here to read the details on how we calculate our Reality Report statistics.
“Swing” trades (per The Wagner Daily)
SMH short –
shorted 28.90, covered 28.41 (avg.), points = + 0.49, net P/L = + $239
Intraday trades (per Intraday Updates E-mail Service)
QQQ short –
shorted 27.57 (avg.), covered 27.23 (avg.), points = + 0.34, net P/L = + $169
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