Commentary:
Much to our dismay, yesterday’s trading action was a repeat of what we have seen for most of the prior two weeks. It consisted of an opening gap into the middle of the range of the prior several days, a rapid move during the first forty-five minutes, choppy and range bound trading for the rest of the day, and, to top it off, light volume. While this type of market action may be profitable for scalpers who are looking to make tiny and quick profits on the market’s momentum, it is quite challenging for technical traders such as ourselves. Since our trading plan dictates waiting until the opening reversal period has passed before entering positions, much of the day’s move has already taken place by this point.
One interesting thing to note was yesterday morning’s bounce off the low of December 13, which formed a perfect double bottom. Upon bouncing off this double bottom, the S&P futures attempted to reverse the downtrend by breaking the 20-MA on the 15 minute chart going into the afternoon. Although it rallied above the moving average twice, it failed both times, sending the S&P back down near its intraday lows. The end result is that after forming the double bottom off the lows of December 13, the S&P chopped around in a tight, 5-point trading range that made it difficult to profit on either side of the market. We realized several small losses yesterday as we attempted both long and short entries, but we only entered HALF position sizes and also used tight stop losses to minimize the risk. Because of this focus on controlling risk, our net losses were small.
In addition to forming a double bottom by bouncing off the lows of December 13, SPY (and the S&P futures) began to form the right shoulder of a bearish head and shoulders pattern that can be seen on the 15-minute chart below:
As you can see, the left shoulder formed on December 13, the head formed on December 16 and 17, the right shoulder was formed yesterday, and the neckline was formed off the lows of December 13 and yesterday. Therefore, a sustained break below yesterday’s low would represent a break of the neckline and continuation of the pattern. Additionally, this would break the 100-day moving average, which is equal to yesterday’s low.
With any head and shoulders pattern, the predicted drop upon breaking the neckline is equal to the distance from the top of the head to the neckline. Since the top of the head is around 91.70 and the neckline is around 89.30, that represents a predicted move of 2.4 points below the neckline. This equates to a price of around $87 on SPY, just below the low of November 13.
There are two important moving averages to watch going into today: the 50-day and the 100-day on all the major indices. While the 100-day moving average matched the lows in SPY and DIA yesterday, the 50-day acted as resistance after the initial morning selloff. An attempt to rally back above the 50-day moving averages was made into the close and after hours yesterday, but we would need to see confirmation of this rally attempt today.
Although the head and shoulder pattern is perfectly set up to follow through, we are not very confident it will follow through today, at least not with any conviction. Despite the talk of war with Iraq that has been giving the market jitters, Oracle’s earnings after the close yesterday gave the market a nice pop after hours. Since we feel the market has been looking for any glimpse of good news to spark a rally, this could prove to be the impetus. While we don’t expect any dramatic moves in the market, we do feel that investors are desperately looking for a reason to see a “Santa Claus” rally and this could be it. Nevertheless, caution is in order with all the sabre rattling and talk of war.
Today’s watch list:
BBH – Biotechnology HOLDRS
Long
Trigger = 90.75 (above the 200-day MA)
Target = 102.00 (highs of May 23)
Stop = 87.30 (below the 50-day MA)
Notes = The Biotech sector showed relative strength during the selloff yesterday and closed nearly flat on the day despite weakness in the broad market. We are continuing to see sector rotation into the Biotech sector and feel this sector could really pop if we get some help from the market.
Our ETF Real-Time Room subscribers are still long BBH as a “swing trade” from December 17, but we continue to watch BBH for an entry that would constitute a multi-week position trade, which would occur with a break of the 200-day moving average.
SPY – SPYDERS (S&P 500 Index Tracking Stock)
Short
Trigger = 89.20 (below the double bottom of Dec. 13 and 18)
Target = 87.45 (the low of Nov. 13)
Stop = 89.80 (above yesterday’s close)
Notes = Just playing a breakdown of the head and shoulders pattern discussed above. However, remember to use the gap rules if SPY gaps down below its trigger price.
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):
The BBH long did not trigger yesterday.
Closed Positions:
- (none)
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