As we often see on the day following a big rally, not much happened yesterday because the markets basically consolidated and traded sideways. This is also known as a correction by time. The Nasdaq was stronger than the S&P futures for the duration of the day, fueled by early strength in the Semis and subsequently the Biotechs. Despite its relative strength, the Nasdaq was choppy throughout the entire day and QQQ traded in less than a forty cent range. Despite pockets of weakness in the market, both SPY and QQQ closed above their 0.382 Fibonacci retracement levels off rally from the Dec. 13 lows. Since the 0.382 level is considered a healthy retracement, no conclusions can be drawn yet about whether Monday’s rally will have any legs.
One interesting thing to point out is that SPY formed a head and shoulders over a two-day period, which can be most easily seen on the 15-minute chart below:
Even though SPY cracked the neckline into the close, it has support of its 200-MA just below which prevented it from following-through all the way yesterday afternoon. In addition, there is support of the 20 and 40 MA on the 60 minute chart just below around 90.75. While the head and shoulders formation looks pretty clean, we’re not too sure that it will follow through in a smooth manner.
Volume was weak again yesterday, about the same as its 9-day average in the NYSE yesterday, but the lowest we have seen in the past 9 days in the Nasdaq. While low volume during consolidation or sell-offs is considered bullish, we remain concerned that every rally attempt, especially the one on Monday, has had volume equal to the consolidation or sell-off days. We need to continue studying market volume over the next couple of days for any signs of change and price divergence. Remember that volume is one of the few reliable leading indicators we have at our disposal.
One ETF we want to keep a close eye on during the coming weeks is BBH, the Biotechnology HOLDRS. This sector, which has been lagging the broad market for the better part of six months, started to show some signs of life yesterday. In particular, yesterday was the first day I can remember in a long time that BBH actually had relative strength to the broad market. When we identified the relative strength in BBH yesterday, we mentioned it in our ETF Real-Time Room and went long at 88.60. We took BBH long overnight and it closed at 90.09, giving us about 1.5 points in open profits so far.
BBH was so strong yesterday that during the selloff into the close, the S&P was trading near the lows of the day and BBH rallied to set a new high during that same time interval. More importantly, it did so on strong volume, indicating real buying interest. Amgen has had some positive news and helped to lead BBH higher yesterday because it is weighted more than 35% by Amgen. In addition, MedImmune received FDA approval for a key flu vaccine after the close yesterday which gives the Biotech sector some positive FDA approval news that has not been seen in quite some time. That should aid BBH today as well.
Putting all the news items aside, BBH is starting to look very interesting on a technical basis because it is testing the $90 level for the fifth time in several months. Each subsequent test of resistance makes it more likely that resistance will be broken and new highs will be set. There is a 200-MA just overhead around 91, but it is smooth sailing if BBH breaks that because the multi-month consolidation period would act as a big springboard to provide strong price support. Finally, there is a bullish cup and handle pattern forming on the daily chart, which would be confirmed on a break of the 200-MA. There is a good chance we will hold BBH long for several weeks if it breaks out over the next few days. Here is a look at the BBH daily chart:
I really don’t have a lot to say about going into today. I think the biggest levels to watch will be the 20 and 40 period moving averages on the 60-minute chart for all the major indices. These moving averages roughly correlate to the 0.382 and 0.50 Fibo retracement levels that we would want to see the market hold if Monday’s rally is to be sustained. Based on the current pre-market gap down at the time of this writing (6:30 AM EST), the market is poised to open in the middle of its range. This is also known as “no-man’s land” and usually indicates choppy trading, at least in the morning session. If volume does not pick up, the choppy trading will be more imminent. Don’t be afraid to sit on your hands if no solid opportunities present themselves. Let the market present you with low-risk, high probability trades. If you don’t see any, then don’t force the market to give them to you. Discipline to not be in the markets when conditions are poor and there is little action is one of the hallmarkets of great professional traders.
Today’s watch list:
BBH – Biotechnology HOLDRS
Trigger = 90.90 (above the 200-day MA)
Target = 102 (highs of May 23)
Stop = 87.10 (below yesterday’s low and the 50-day MA)
Notes = Subscribers to our ETF Real-Time Room are already long from yesterday, but this is likely to be a multi-week trade if it triggers. That is why there is a large profit target and also a large stop.
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):
Neither the MDY long nor the BBH short triggered yesterday.
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