Last week was one of the more challenging trading weeks we have seen in quite a while, primarily due to very light volume and the associated lack of broad market direction. The total volume on both the NYSE and Nasdaq last week was the lightest we have seen since the middle of September (with the exception of the shortened Thanksgiving week). Given that fact, it’s really not surprising that conditions were so choppy and filled with indecision. We saw much of the same pattern every day last week that consisted of a counter-gap move out of the open, a whipsaw in the other direction, and then a narrow, listless trading range for the rest of the day. While it was the kind of week that scalpers often thrive in, it was not ideal for “trend traders” such as ourselves. Nevertheless, we played it conservatively, protected capital, and even made a little profit for the week.
Two of the most important indicators that we discussed throughout all of last week are the 20 and 50-day moving averages. The major market indices began last week trapped in the middle of those two moving averages, slowly attempted to rally up to their 20-day moving averages, and got whacked to close right on their 50-day moving averages. In fact, it is uncanny how the 50-day moving average provided price support on Friday, almost to the penny with the major index ETFs.
Coming into Friday, the 50-day moving average on SPY (the S&P 500 Index SPYDER) was at 89.36. Within the first forty-five minutes of trading, SPY sold off hard, broke price support of the prior several days and bounced off a low of. . . you guessed it. . . 89.36! This bounce off the 50-day MA caused a bounce back up to the high of the day that peaked out around 1:00 pm. before the market began selling off again into the close. By the time 4:00 pm EST rolled around, SPY was back down to the low of the day and had an official closing price of 89.34, within two cents of its 50-day MA. Pretty amazing, isn’t it? Looking at a daily chart of SPY, you will also notice convergence of the 100-day moving average, just a few cents below the 50-day:
It was not only the S&P 500 that had a precision bounce off the 50-day MA. Both DIA (the Dow Jones Industrial Average) and QQQ (the Nasdaq 100 Index) traded in a very similar pattern on Friday. The 50-day MA on DIA was 84.30, the low of the morning selloff was 84.40, and the closing price of DIA was 84.37. The 50-day MA on QQQ was 24.94, the low of the morning selloff was 25.10, and the closing price of QQQ was 25.04. In addition to the 50-day MAs, there are two other important technical levels that should act as support going into this week.
First, notice the 20-WEEK moving averages for the major indices is near current price levels. For SPY, the 20-week MA is at 89.41, only five cents higher than the 50-day MA. The 20-week MA for DIA is 84.29 (the same as the 50-day MA), while the 20-week MA for QQQ is at 24.12 (still below current prices). Here is a weekly chart of SPY that illustrates the 20-week MA:
In addition to the 20-week and 50-day MAs, many of the major indices are now approaching their 0.382 Fibonacci retracement levels off the entire rally from the lows of October 10 to the highs of December 2. Typically, this is the level that a healthy uptrend will retrace to before turning back up and going higher again. The 0.382 retracement for each of the major index ETFs is as follows: SPY 88.85, DIA 83.57, QQQ 25.34. Both SPY and DIA are above their 0.382 levels, while QQQ actually closed below it on Friday. If the 50-day and 20-week moving averages do not hold, expect the 0.382 Fibo levels to provide price support. Below that, the 0.50 Fibo level becomes even more important (click here for a primer on Fibonacci).
Whew! That’s a lot of price levels to digest, but the point is that all the three indices we follow each have major, multiple support levels at or near current price levels. Despite the fact that the market closed at its lows of the week on Friday, we would be surprised if the market moves much lower without first seeing a significant attempt at a rally, especially when combined with the historical “Santa Claus rally” the market usually sees the week before Christmas. However, like the disclaimer says, “past performances do not necessarily indicate future results.” So, don’t get it too etched in your brain that Santa will save the market because there continues to be a lot of war concerns and increased tensions from all over the world. As each day grinds on, we think the market will start to think in terms of not “if” there will be a war, but “when” there will be one. This could actually be interpreted as a positive for the market because war will begin to be priced into the market.
We feel the best way to play this week is conservatively. Volume is again likely to be light, which would continue to provide us with choppy conditions. We also feel it is a bad risk to be heavily exposed overnight right now, so we will probably focus on intraday trades this week to reduce risk exposure. While we feel pretty confident the market will bounce this week, it may not happen today. In fact, if the indices fail to bounce off the 20-week and 50-day MAs, we could really see panic start to set in. But, assuming a rally does come, the big question will be how high will the rally take us? We’ll take it one day at a time.
Today’s watch list:
SPY – SPYDERS (S&P 500 Index Tracking Stock)
Trigger = 90.25 (above upper channel of downtrend of past two days)
Target = 91.50 (resistance of 200-MA on 60-min. chart)
Stop = 89.60 (below support of Friday’s consolidation)
Notes = Just playing a small bounce. Not the best setup in the world, so we will probably only trade half position size due to overhead resistance.
XLF – Financial Sector Select SPYDER
Trigger = 22.28 (below the 50 and 100-day MAs)
Target = 21.75 (low of Nov. 13)
Stop = 22.55 (above Friday’s close)
Notes = Financial sector is starting to roll over on the daily chart. A break below Friday’s low could spur a big selloff. Be aware that this ETF has a very narrow intraday range, so we increase our position size accordingly when trading XLF.
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):
OIH triggered, we bought a half-position and stopped out. We used the gap rules and sold MDY into a bounce after gapping down below our stop.
- MDY long (HALF position) –
bought 80.54, sold at 79.85, points = (0.69), net P/L = ($62)
OIH long (HALF position) –
bought 60.41 (avg.), sold at 59.55, points = (0.86), net P/L = ($110)
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