Commentary:
The combination of the 50-day MA, the 20-week MA, and the 0.382 Fibonacci retracement level all acted in concert to provide price support on the major indices yesterday that spurred a solidly uptrending day that began after the initial gap up and lasted all the way into the close. Even though we anticipated a rally based on the technical levels we discussed yesterday, we needed to see some type of price confirmation before going long. That confirmation came in the form of a break of resistance of the upper channel of the downtrend from the highs of December 2. Take a look:
Once SPY broke the resistance point labeled above, we went long with a stop just below the breakout point. When SPY confirmed the breakout by staying above Friday’s highs (also the 20-MA on the 60-minute chart), we added to the position and began trailing a stop higher throughout the day. Through the use of trailing stops and , we sold our position near yesterday’s highs without exposing ourselves to the risk of giving our profits back if the market reversed. We also bought DIA (per discussion in our ETF Real-Time Room) when it broke resistance yesterday and managed it the same way as SPY. We netted over two points of profit between those two trades yesterday, including a re-entry we made on a pullback in the afternoon.
While the rally was indeed solid yesterday, one thing that continues to make me cautious is the lack of volume. Strangely, yesterday’s volume in both the NYSE and Nasdaq was identical to the lackluster average daily volume we saw in last week’s choppy sessions. Volume on the NYSE was only 1.22 billion shares, about 15% shy of the 50-day moving average which is at 1.45 billion shares. Considering the wide range of the rally yesterday, we expected to see an increase over last week’s volume, which would confirm the return of buyers to the market. However, the light volume indicates there was simply a lack of sellers rather than an abundance of buyers. These are the worst kind of rallies because they can reverse just as quickly as they went up. Since volume typically leads price, a broad market rally is rarely sustained without seeing a corresponding increase in volume. Therefore, we need to remain skeptical of a continuing “Santa Claus” rally unless we see volume pick up.
The key pivot level to watch on SPY and DIA today is the 200-MA on the 60 minute chart, which also corresponds with the highs of December 11. SPY closed just above that level yesterday, while DIA closed right on it. That level will act as support or resistance today (depending on whether the indices open above or below it). The 200-MA on the 60 min. chart for SPY is 91.45 (909 for S&P futures) and is 86.45 for DIA (8623 for the Dow). Unlike SPY and DIA, QQQ closed well below its 200-MA on the 60-minute due to relative weakness yesterday. Notice how DIA closed right at resistance of its 200-MA:
If we get above yesterday’s highs in SPY and DIA (and hence the 200-MA on the 60 min.), the 20-day moving averages just overhead are likely to act as significant resistance (especially without an increase in volume). The 20-day MA is at 91.99 for SPY (913.65 for the S&P Futures) and is at 86.94 for DIA (8671 for the Dow). QQQ is well below its 20-day MA, which is at 26.61. While a rally above the 20-day MA in the S&P would certainly be bullish, it also would begin to form the right shoulder of a head and shoulders pattern on the daily chart. However, we won’t discuss the head and shoulders pattern until we get a little more confirmation.
Be aware there are six different economic reports scheduled to be released before the open today. Two of the most important numbers, CPI and Housing Starts, could both be market movers. That is why we went to cash overnight despite the market’s strong closing prices. While we remain optimistic about the probability of a continuing rally today, we are also cautious because of the light volume. As always, we’ll let the market settle going into the 10 am reversal period and see if there is any conviction in holding above yesterday’s highs. If so, we’ll probably take some long positions. Otherwise, cash is probably the best bet.
Today’s watch list:
MDY – Mid-Cap SPYDER
Long
Trigger = 81.03 (above yesterday’s high, the 20-day MA, AND the high of Nov. 4)
Target = 82.25 (resistance from highs of Nov. 25)
Stop = 80.45 (below yesterday’s close and the 20-day MA)
Notes = Unlike SPY, DIA, and QQQ, this index closed above its 20-day MA yesterday. Therefore, if there is any strength in the market today, MDY does not have to deal with the resistance of its 20-day MA. We will look to buy on a break above the whole number of 81 because that will confirm the breakout above the 20-day MA.
BBH – Biotechnology HOLDRS
Short
Trigger = 86.95 (below the 50-day MA)
Target = 84.75 (support of the 100-day MA)
Stop = 87.90 (above yesterday’s high)
Notes = The Biotechnology index has been showing relative weakness for the past week, which was evident yesterday by the weakness into the close despite broad market strength. If there is weakness in the market today, BBH could break support of its 50-day MA.
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 long triggered and rallied to our target price. XLF short did not trigger.
Closed Positions:
- SPY long –
bought 90.33 (avg.), sold 91.37 (avg.), points = + 1.04, net P/L = + $168
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