The most notable thing about yesterday’s trading action was the divergence between the Nasdaq (QQQ) and the S&P Futures (SPY) during the selloff that set new lows for the past three weeks. After being unable to recover off the opening gap down, the Nasdaq futures broke the opening low after the first thirty minutes of trading and dropped below Friday’s low by 11:00 am EST. The Nasdaq continued its selloff through the remainder of the day after consolidating near the lows (correcting by time) for several hours during the mid-day doldrums. Despite the strong selloff in the morning, the Nasdaq was unable to break above its 20-period moving average on the 15 min. chart during the reversal attempt that came at 2:00 pm. This caused the Nasdaq to set new lows into the final hour of trading before eventually closing at the low of the day. Initial weakness in the Nasdaq was fueled by the Semiconductor stocks, but the Biotechs later reversed early gains and collapsed, driving the Nasdaq lower.
Despite the weakness in the Nasdaq, the S&P and Dow showed more strength for much of the day until they both weakened into the final hour of trading. Unlike the Nasdaq, the S&P began the day in a very tight trading range and remained that way for the first two hours of trading. Despite the Nasdaq’s break of Friday’s low by 11:00 am, the S&P futures remained above Friday’s low for most of the day until it finally broke that level during the final thirty minutes of trading. We took profits on our SPY short in anticipation of a reversal going into the mid-day doldrums at 11:30 am EST. The reversal eventually came, but not until about 2:00 pm. Like the Nasdaq, once the S&P was unable to stay above the 20-MA on the 15 min. chart, it set new lows into the close.
Although we made some profit shorting SPY yesterday morning, the “slow-bleed” in the S&P made it difficult to stay short during the mid-day doldrums because reversals often come fast and furiously when the market is in “slow-bleed” mode. In fact, the Dow (and DIA) was in a proportionately tighter range than the S&P, making it difficult to short DIA, which we got stopped out of for a tiny loss. In hindsight, it would have been easier to stay short the Nasdaq because it was so much weaker than the S&P and Dow, but sometimes you pick the wrong trades. Nevertheless, we had a breakeven day yesterday and there was no harm done.
Most of the major indices, as well as many individual sectors, are now approaching their 50-day moving averages after having dropped below their 20-day MAs. Remember that the longer the time frame of the moving average, the more significant that level acts as support or resistance when indexes approach it. Therefore, a 50-day MA holds more weight than a 20-day MA and we fully expect to see a solid bounce off of support of the 50-day MAs. Since the 50-day MA is still below the current prices of many of the indices, we could see another period of selling before finding support. But, the odds are pretty good that the market will rally this afternoon, especially if there is follow-through weakness in the morning. We’ve also noticed that indexes tend to bounce prior to hitting important moving averages because everyone is watching the same support level, thereby making it a self-fulfilling prophecy.
Even though the Semiconductor index closed on the lows yesterday, we took a half position of SMH long overnight in anticipation of a rally in that sector today. Although not extremely obvious, there were several subtle signals that made us believe we will see a bounce in the SOX index today. The first thing we noticed is divergence between the Semiconductor Index and the Nasdaq during the final hours of trading yesterday. In particular, the Nasdaq futures set a new intraday low around 1:45 pm, but SMH actually set a higher low during that same period. Divergence occurred again when the Nasdaq easily set new intraday lows during the final thirty minutes of trading, but SMH basically tested the prior lows (probed below by only a few cents). When you start to notice subtle divergence in a sector that has been weak for a period of time (such as the Semis), it is often an early indicator that the sector is ready to reverse (or at least bounce) the next day.
Aside from the intraday divergence in the Semis, we really liked the daily chart of the index because SMH has now retraced nearly perfectly to a 50% Fibonacci support level, meaning that SMH has now given back half of its gains from the two-month long rally. With rare exception, the 50% level yields a bounce, especially when looking at such a relatively long time frame. In addition, there is support of the 50-day MA just underneath, which should offer additional support in the index. This type of contrarian play is not common for us, but the risk/reward ratio was very good and we viewed taking a half position long overnight as a low-risk trade. The chart below illustrates the Fibonacci retracement levels on a daily chart of SMH:
Today’s watch list:
SMH – Semiconductor HOLDRS
Trigger = HALF at 24.60, HALF at 24.85 (above 20 MA/15 min., then above upper channel of downtrend)
Target = 26.10 (resistance of 200-MA on 60 min. chart)
Stop = 24.20 (just below yesterday’s low)
Notes = See commentary above regarding Semiconductor Index
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 (discussed in the ETF Room) 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):
We netted a small profit on the SPY short, but we only took half a position due to the tight trading range in the morning.
SPY short (HALF position) –
shorted 91.00, covered 90.66, points = + 0.34, net P/L = + $26
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