When yesterday morning’s opening gap up did not get filled, this caught many traders by surprise because of how weak the market closed the previous day. Many expected the gap to be filled and for the major indices to drop to their 50-day moving averages before seeing any kind of a rally. Instead, the opening gap held and had a small breakout going into the 11:30 am reversal period, led by strength in the Nasdaq. The Nasdaq was much stronger than the S&P yesterday morning due to strength in the Semiconductor Index, which was the strongest sector in the market yesterday. Within the first hour of trading, there was so much divergence that the S&P futures (and SPY) was trading near the lows of the day while the Nasdaq (and QQQ) traded near the highs. This divergence made for choppy, range-bound trading early in the session, but the S&P eventually gained some momentum once the Nasdaq broke out.
By the end of the day, it was the exact opposite scenario because there was more strength in the S&P than the Nasdaq. During the final forty-five minutes of trading, the S&P had a strong rally that set new highs on the day, but the Nasdaq did not follow suit and barely even rallied at all. This was due to accelerated weakness in the Biotech sector, a big component of the Nasdaq. While the Semis remained strong, the Biotechs were very weak, thereby causing the Nasdaq to lose its early strength and fizzle out into the close.
Our SMH long setup worked great for us yesterday and we correctly anticipated the bounce off the 50% Fibo retracement level, despite weakness in the SOX the previous day. We netted over 3% on our SMH trade and still have a small position open going into today. We also profited from a QQQ long trade that was mentioned in the ETF Room. Even though yesterday was quite profitable for us, it was a rather lackluster trading day that would have been uneventful had we not been in the right sector.
Because yesterday’s trading range was completely inside of the previous day’s trading range, this is known as an “inside” day and it puts the market in “no-man’s land” going into today. This means that we do not see many clear trade setups out there because the major indices are trapped between support and resistance. Most of the major indices tested resistance of their upper channels of the downtrend that has been in place since the beginning of last week. While the market could breakout today, we need more confirmation that the downtrend has been broken, which would occur if the indices trade above yesterday’s highs. However, even if SPY, DIA, and QQQ break above yesterday’s highs, there is a lot of moving average resistance just overhead. In particular, most of the indices have their 20-day MAs just above yesterday’s highs. Since this level acted as support on the way down, it will equally act as resistance on the way back up. In addition, most of the indices have 200-MAs just above yesterday’s highs on both the 60 min. and 15 min. charts. This decreases the risk/reward ratio of going long, even if yesterday’s highs are broken.
The two areas that we think looks better than the three major indices is the small and mid-caps in the form of IWM (Russell 2000 Index iShares) and MDY (Mid-Cap SPYDER). The mid-cap stocks traditionally see strength in December and this year appears to be no different. Unlike SPY, QQQ and DIA, IWM closed above its 20-day moving average yesterday and MDY closed within a few cents of it. Both IWM and MDY are also above their 200-day MAs on the 60-min. chart as well. Therefore, if there is any strength in the market today, those are two ETFs that we want to look at as possible long trades.
Today’s watch list:
IWM – Russell 2000 Index iShares
Trigger = 78.95 (above the two-day high)
Target = 80.10 (resistance from high of Dec. 4)
78.40 (below the 20-day MA)
Notes = See commentary above
BBH – Biotechnology HOLDRS
Trigger = 85.95 (below triple bottom at 86 area on daily chart)
Target = 84.25 (low of Nov. 13)
87.05 (above the 20-MA on 15 min. chart)
Notes = As mentioned earlier, the Biotechs showed a lot of relative weakness yesterday and we believe there could be follow through today. The daily chart looks pretty bad because BBH is now below both its 20 and 50-day moving averages. Confirmation would be a break of yesterday’s low. However, remember the gap rules before entering this trade.
Be aware that BBH can be a very volatile stock, so we will be decreasing our share size to compensate.
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 had quite a profitable day on SMH yesterday and we also took 1/4 of the position overnight into today.
- SMH long (3/4 position) –
bought 24.73 (avg.), sold at 25.41 (avg.), points = +
0.68, net P/L = + $296
- SMH long (1/4 position) –
bought 24.73 (avg.), new stop at 24.95, open points = +
0.65, open net P/L = + $94
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)
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.
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