Yesterday was very much a repeat of the action we have been seeing for the prior three days, except with an added twist of volatility that made it very challenging to profit on either side of the market. Though the afternoon traded in a narrow range much like we have seen the prior several days, the morning was just plain whacky! After trading down in the early pre-market, the Retail Sales report (and apparently the negative Jobless Claims report) reversed the direction of the futures, causing a positive open at 9:30 EST. When the market opened, the Nasdaq initially had a lot of relative strength and gapped up above the previous day’s high. However, the S&P futures gapped up only slightly to open in the middle of the previous day’s range. This divergence continued for the rest of the day with the S&P futures showing weakness to the Nasdaq.
By the time 12 noon rolled around, the S&P futures (and SPY) had rallied to set a new intraday high, sharply sold off to break the previous day’s “swing low,” rallied back to set a new intraday high, then sold off to break the intraday lows. It was enough to give traders a bad case of whiplash! The action settled down a bit after the mid-day doldrums, but the narrow trading range did not provide any trading opportunities either. We realized small losses on our SPY short and IWM long (mentioned in the ETF Real-Time Room), and are still in half a position of MDY long. Considering the action yesterday, we felt pretty good that we kept our losses tight and were disciplined enough to realize it was not wise to enter any more trades.
Does the phrase “no-man’s land” sound familiar? That’s where the market once again stands going into today, as it is stuck in the middle of a narrow four-day trading range with resistance of the 20-day moving average overhead and support of the 50-day moving average below. Volume has been very light for the past week, which is continuing to add to the lack of direction because it indicates traders are not interested in committing money to either side of the market right now. Though the market could still go either way from current levels, we are starting to think the next move will be down because the rally attempts over the past several days have failed. This means that the daily charts are showing a selloff from last week and subsequent consolidation at the lows (which we are seeing now). The longer the markets consolidate at the lows, the more likely they are to break lower (just as price consolidation at the highs is considered bullish).
If the market breaks support of the trading range, there are two things to be aware of. The first thing is that volume needs to confirm the selloff. While it makes sense for volume to be light during a trading range, we would expect volume to increase once the trading range is broken and sell orders start getting triggered. Therefore, if we break below the trading range but the volume does NOT increase, we would be cautious because the volume needs to confirm the break below support. Second, remember that there is a 50-day moving average just below the current trading range in all the major indices. The 50-day MA is an important level that many technicians closely follow, so we expect the market to find support if it drops to its 50-day MA. This increases the risk of shorting, but does not make buying a much better risk.
Be aware that spot gold has spiked to a new three-year high overnight in London trading. This is probably due to weakness in the dollar. Putting all technical chart patterns aside, this is reason enough to be cautious today because there seems to be a sudden rush to safety. All the geopolitical events seem to be putting traders and investors on edge as well (N. Korea scuds, Iraq declaration, Iran building nuke plants, et cetera). Even though the market seasonally rallies around this time each year, I think these events are overweighing seasonal factors. So, let’s all be cautious in the days ahead because there is no reason we need to be aggressive in the markets right now. Remember that the best traders are OUT of the markets more than they are IN the markets because they only choose to participate in battles they are likely to win.
Today’s watch list:
OIH – Oil Service HOLDRS
Trigger = 60.30 (above yesterday’s high)
Target = 61.80 (high of Dec. 3)
Stop = 59.65 (just below the 200-day MA)
Notes = This is a good technical and fundamental play. On a technical basis, OIH just broke above its 200-day MA, which is normally a big resistance level that should now act as support. Fundamentally, we think that Middle-East tensions are continuing to drive the price of Oil higher.
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 Intraday Real-Time Room
trades not reported):
SPY triggered and stopped out. MDY triggered and we closed half and took half overnight. BBH did not trigger.
- SPY short –
shorted 90.44, covered 90.91, points = (0.47), net P/L = ($83)
MDY long (HALF position) –
bought 80.54, sold at 80.45, points = (0.09), net P/L = ($11)
- MDY long (HALF position) –
bought 80.54, stop at 79.95, open points = (0.04), open net P/L = ($5)
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