The market began the day yesterday with a large opening gap up on the heels of strong retail sales reports from the first official weekend of holiday shopping season. Because the market was weak and closed near the lows on Friday, there were many traders (including us) who were short over the weekend and got squeezed in yesterday’s opening gap. However, given Friday’s light volume, we were not too surprised by a gap in the opposite direction.
When the previous trading day closes near the lows and the next day gaps open above the previous day’s highs, this “traps” the bears who were short, hence the commonly-used term “bear trap.” When we see this type of opening gap, it often holds up well because the short covering by the “trapped bears” further adds to the rally. However, this was not the case yesterday because the opening gap quickly faded after a worse than expected ISM (factory) report was released at 10:00 am. This set the selling in motion that quickly brought the S&P down to test the low of the previous day, while the Nasdaq sold off down to the previous day’s trading range. It was also nice to see that strong volume returned to the markets yesterday.
After consolidating near the lows during the mid-day doldrums, the S&P and Nasdaq futures both broke support around 1:30 pm EST, causing the S&P futures (and SPY) to trade well below Friday’s lows, while the Nasdaq tested Friday’s lows before both indices found support at the 200-period moving average on the 15 minute chart.
Out of all the moving averages we follow, the 200-period moving average is among the most powerful, no matter which time frame is used. The 200-MA tends to act as a magnet, pulling indexes back down to that level when they rally too far above it and pulling indexes up to that level when they sell off too sharply. Once an index is near a 200-MA, indexes nearly always bounce off that level as either support or resistance. Of course, the longer the time frame being measured, the more powerful the moving average becomes. In the case of yesterday, notice how the Nasdaq futures (and QQQ) found support at the 200-period moving average on the 15 minute chart:
The S&P futures bounced off that same support level yesterday, though the index initially probed below the 200-MA:
Despite the weakness in the market yesterday, one interesting point is that the Nasdaq futures (and QQQ) closed above its 200-day moving average for the first time since the breakout attempt began last week. This sets up the Nasdaq to now use the 200-day MA as a support level, assuming it holds. Therefore, watch that 200-day MA (currently at 27.87 for QQQ) as a key support level today. If the Nasdaq gets below that level, we could see some heavy selling set in, especially if yesterday’s low of 27.57 is broken. On the upside, watch the 28.30 level on QQQ (1137 area on the Naz futures) because the Nasdaq could rally if it breaks beyond that level which has acted as resistance for the past week, with the exception of the gap yesterday morning.
SPY and DIA both came within less than 50 cents of testing their major resistance levels from the end of August. The highs that were set at the end of August are very important levels to watch because the S&P and the Dow could form a big ‘ol double top if they fail to break those levels, especially the Dow which has big resistance at the 9100 area (see our special report on the Dow). Even though we had a long setup on SPY yesterday, the large opening gap threw the risk/reward ratio out of whack in the morning, which is why we did not enter SPY long (as discussed in the RTR Room).
There is a slight opening gap down this morning and some negative news in the Financial sector today. We’ll have a better idea as to what type of day to expect after the initial reversal period at 10:00 am, but we recommend you focus on watching the 200-MA on the 15 minute chart today because a break below that could set off another round of selling. Otherwise, if it holds, we could easily test yesterday’s highs.
Today’s watch list:
SMH – Semiconductor Index HOLDRS
Trigger = 28.95 (below yesterday’s low; also the 40-MA on the 60-min. chart)
Target = 28.05 (support of the low of last week)
Stop = 29.45 (above resistance of yesterday’s close)
Notes = The SOX index started out as one of the strongest index with the gap up yesterday, but was one of the weakest sectors by the end of the day. This formed a bearish candlestick pattern on the daily chart that is known as a “gravestone doji.” It is distinguished by a long tail on the top, with the open and close both at or near the lows of the day. This pattern often indicates a reversal in an index or stock. In addition, yesterday’s range completely engulfed the previous day’s range and closed at the previous day’s low, which is also very bearish. If SMH trades below yesterday’s low, there is a good chance it will trade down to its next support at the 28 area on the daily chart.
Note that we are already short a partial position of SMH from overnight, so this is a completely separate trade that will be an addition to our existing open position. Updated stops will be presented in the ETF Room and will be emailed to The Wagner Daily subscribers.
Daily Reality Report:
As mentioned above, we did not enter the SPY long setup yesterday due to the large opening gap, which threw our risk/reward ratio out of proportion. We also covered half of our SMH short into the pullback yesterday morning, but reshorted part of it once the SOX index confirmed its weakness.
Click here to read the details on how we calculate our Reality Report statistics.
“Swing” trades (per The Wagner Daily)
PPH short (HALF position still open from Dec. 2) –
shorted 78.25, will adjust stop in morning, open points = + 0.37, open net P/L = + $33
SMH short –
WE HAVE COVERED PART OF THE POSITION AND RESHORTED YESTERDAY. WILL UPDATE AVG. PRICES AND PROFITS IN NEXT REPORT. STOPS WILL BE EMAILED TO ALL SUBSCRIBERS WHEN ADJUSTED.
Intraday trades (per Intraday Updates E-mail Service)
PPH short (HALF position from Dec. 2; HALF position still open) –
shorted 78.25, covered HALF at 77.51 (avg.), points = + 0.74, net P/L = + $68
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