Commentary:
The markets had a small opening gap up yesterday morning which put the major indices at or just below resistance of the previous day’s highs. Because the indices broke support of the multi-month uptrend the prior day, odds were pretty good that the gap would fade fast as sellers perceived the opening gap as a chance to get out before things got worse. If the gap up would have based and consolidated, it would have potentially set up the market for a rally in the morning. However, as soon as we noticed the gap was quickly fading, we initiated some short positions in SMH, QQQ, and SPY with stop losses set just above the previous day’s highs. Since we shorted a gap up into the previous day’s resistance, this created a positive risk/reward ratio because the potential profit on a downside move was much greater than the amount we were risking the market broke the previous day’s highs.
After the market entered the reversal period and continued selling off, we noticed that the Nasdaq was showing more relative strength than the S&P because it was still trading above the previous day’s close, whereas the S&P was well below the previous day’s close. Because of this divergence, we took profits in our SMH and QQQ short positions and added to our SPY and DIA shorts instead because we always want to short the weakest sectors in a downtrend (and long the strongest ones in an uptrend). Later in the afternoon, QQQ and SMH finally cracked, but it was a better risk to be short SPY instead.
Since the market had such a strong selloff in the morning, we were anticipating a decent bounce in the early afternoon. So, we took profits on HALF the shares of our SPY and DIA shorts before the mid-day doldrums, but remained short the other half of the shares in the event the market corrected by time rather than price (which would have resulted in a move lower without a bounce first). When the bounce finally came around 1:30 pm, we were ready and waiting to add to the shares of our short positions once the indices rallied into resistance. We identified the key resistance as being the low that was set in the late afternoon of the previous day, which also closely correlated with the 40-period MA on the 15 min. charts of the major indices. Upon hitting our trigger price, we added to our short positions, which worked out to be within a few cents of the highs. We then scaled out of the short positions (with a nice profit) into the final hour because we saw the market forming a double bottom into the close. Overall, yesterday was a good trading day meaning that the major indices closely followed basic patterns of technical analysis which made for a profitable and solid day.
The daily charts on the major indices are now looking pretty bad. To begin with, SPY, DIA, and QQQ are each below their 20-day moving averages, which was formerly acting as a support level. This occurred yesterday when each index was struggling to hold on to its 20-MA, but eventually fell victim to selling. The Nasdaq nearly formed a bearish “engulging” candlestick pattern on the daily chart, which occurred because it gapped up above the previous day’s highs and closed at the previous day’s low (a true engulfing pattern would actually close BELOW the previous day’s low). In addition, each of the major indices closed at their intraday lows, which could set up the market for another day of selling if the consolidation at the lows continue into today’s morning session.
Intraday trading is likely to be a bit choppy today because the major indices are approaching decent price support just below yesterday’s lows, particularly around the highs of Nov. 14 – 19. Also, each of the major indices closed just above support of their 200-MAs on the 60 min. chart, which is a significant level because of the duration of the time interval. This means that the risk/reward of shorting intraday is probably not that good today unless yesterday’s lows are broken and the market does not recover into the first reversal period at 10:00 am. If this occurs, the morning could consist of another downtrend until SPY finds support around $90, which is just above the 20-week MA. We still believe the risk/reward for shorting over a multi-week period is much better than intraday given the trendline of the rally that was broken a few days ago. Since we’re cash going into today, we will likely take a step back and just watch the action into the first reversal period so we can determine if an intraday trend is going to be established before entering any trades.
Today’s watch list:
SPY – SPYDERS (S&P 500 Index Tracking Stock)
Short
Trigger = 90.95 (below yesterday’s low and the 200-MA on the 60 min.)
Target = 90.00 (the low of Nov. 20)
Stop = 91.30 (tight stop above yesterday’s low)
Notes = Again, this is not the best risk/reward ratio on this setup, but it could work out well if the market breaks yesterday’s lows. However, if SPY gaps down to the trigger price, remember the gap rules before shorting.
Daily Reality Report:
Because of the increased number of intraday trades in our new ETF Real-Time Room, we are in the process of modifying the way we report daily results in order to minimize confusion to subscribers of The Wagner Daily. Essentially, we will continue to report and update you on open positions each morning. Therefore, you will always know where we stand with any open positions that were discussed in the newsletter. In addition, all trade statistics will continue to be compiled as they were before. However, we will be displaying the summary of all intraday trades only once per week instead of daily. This is a much more efficient and less confusing way of reporting our trades, especially on days when we enter the same position two or three times intraday.
Click here to read the details on how we calculate our Reality Report statistics.
“Swing” trades (per The Wagner Daily)
Closed Positions:
-
We entered both SMH and QQQ short yesterday per the newsletter. We closed them out with a profit. Will update details as per note above.
Open Positions:
-
(none)
Intraday trades (per the ETF Real-Time Room)
-
(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