Commentary:
Friday began the day with a big opening gap down due to major price support on the heels of weaker than expected employment data released before the open. The opening gap down caused SPY to open at key support of $90, so the market quickly recovered and filled the gap within the first thirty minutes of trading. Because there was such significant price support at $90 on the daily chart, advanced traders could have faded the gap by going long within the first few minutes of the open and keeping a stop just below whole number support at $90. However, this type of trade (“the fade”) can often be a bit tricky for less experienced traders because it is difficult to determine exactly how far the rally will go before running out of momentum and heading back down. Since the 1.5% opening gap down was so large, there was also a good possibility that the gap would remain intact.
Once the gap was filled, the market remained in a narrow range for the rest of the morning session and most of the afternoon due to overhead resistance of the 20-day moving average on SPY, QQQ, and DIA. This made the risk/reward ratio of entering any new trades was not good because the market had already made such a large move off the lows and there was a lot of overhead resistance from the prior two days and the 20-day MA. Despite the resistance of the 20-day MA, there was enough bullish divergence in the Nasdaq futures to break resistance of the upper channel of the downtrend from the highs of December 2. As such, we bought a half position of QQQ upon the break of resistance and sold later in the afternoon for a small profit. The chart below illustrates the break of the 5-day trendline:
Other than fading the opening gap and taking a partial position of QQQ on the break of its short-term resistance, there were not many low-risk trade setups on Friday. Volume was light on Friday (as it was on Thursday), which further confirms the lack of indecision.
Despite Friday’s reversal off the lows and closing prices near the intraday highs, there remains a lot of resistance that was created in the major indices during the past week. The key level to watch going into today continues to be the 20-day moving average. SPY closed just pennies above its 20-day MA, while QQQ closed just below it. In both cases, it is too close to say whether this closely watched level will act as support or resistance today. If the major indices drop below their respective 20-day moving averages on the open and stay below those levels during the first thirty minutes of trading, that is bearish and will increase the odds of another selloff today. Support will be found at the lows of December 5 and then at Friday’s lows.
If the market manages to stay above its 20-day moving average during the first thirty minutes of trading, we could see a rally up to the 200-period moving average on the 15 minute chart. That level is presently at 27.17 for QQQ and 92.86 for SPY. Most importantly, remember that the lower channel support of the major uptrend from October 10 was broken last week. This means the market will have a difficult time getting through that trendline and any test of that level is shortable. The daily chart of QQQ below illustrates the key resistance levels to watch. The SPY and DIA charts both look similar:
Finally, remember to keep an eye on the powerful weekly charts of the indices. Although intraday trades cannot be based on patterns in the weekly charts, they’re important to watch because they give you an idea of the “big picture” and the longer-term trend that is taking place. Many of the weekly charts are starting to set up bearish reversal patterns. In particular, QQQ formed a bearish “engulfing” candlestick pattern last week by opening higher than the previous week’s high and closing below the previous week’s low. This bearish pattern often indicates a reversal in the current trend. Take a look:
Despite the “engulfing” pattern above, don’t get too bearish yet because all of the major indices are still above their 20-week moving averages, a level that is technically more important than the 20-day moving average. The 20-week MAs are as follows: QQQ – 24.00, SPY – 89.23, DIA – 84.21. Let’s watch these levels as support going into this week.
Today’s watch list:
SPY – SPYDERS (S&P 500 Index Tracking Stock)
Short
Trigger = 90.95 (below the low of Dec. 5)
Target = 90.00 (the low of Dec. 6)
Stop = 91.35 (above resistance of the 200-MA on the 60 min. chart)
Notes = This was one of our setups on Friday, but the large opening gap down voided the play. Friday’s recovery off the lows improves the risk/reward ratio of shorting SPY below 91.00 because it increases the amount of overhead supply (resistance). Since the market is gapping down in the pre-market, 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. We will continue to report and update you on open positions each morning; 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 (in The Wagner Weekly) instead of daily. This is a 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.
Trades only from The Wagner Daily (ETF Room trades not reported):
The SPY short from Friday did not trigger due to our gap rules, which stipulate that we wait for a break of the 20-minute low whenever a trade gaps down and opens below our trigger price.
Closed Positions:
-
(none)
Open Positions:
-
(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