After the opening gap down in the S&P and Nasdaq futures faded, the Nasdaq shot out of the gates, rallying above resistance from the previous day. When we noticed the momentum and volume in the Nasdaq, we bought the opening gap down in QQQ also due to the positive after-hours action the prior evening. Because we had a tight stop, the risk/reward ratio of buying the gap down was very positive, as were only risking about 20 cents to make several times that amount. Our analysis was correct because the Nasdaq quickly ran all the way to the high of the previous day, breaking its 200-MA on the 15 minute chart. Most importantly, volume in the first thirty minutes of trading was abut 20% higher than the average of the past two weeks, indicating there was real conviction to the move. We were quickly in the money with QQQ by about 40 cents and the Nasdaq began consolidating at the highs, indicating a move higher. Unfortunately, sudden news that Iraq had a “material breach” in their weapons declaration was released around 10 am which caused a panic reaction that made the market quickly collapse and break the lows of the day without even a bounce to sell into. Although we had a great technical setup and our analysis was correct, the news was simply more powerful than the technicals. Although a situation like that is rare, we stuck to our stops and obeyed our plan. Even though we actually got stopped out of the QQQ trade, it was not a big deal. We are consistently profitable traders month in and month out because we stick to our plan over the long term and do not worry about day to day results or news that affects a good setup.
The Nasdaq initially fell harder than the S&P, but the situation reversed in the afternoon when the Semis began showing strength and held the Nasdaq up. One technical indicator I think helped to prevent the SPY (and the S&P futures) from collapsing yesterday is that the index bounced off the 0.382 Fibonacci retracement level on the runup from the low of October to the high of December 2. This typically is a level where uptrending markets or indices will find support before attempting to make another leg higher. For more information on Fibonacci, read this article we wrote. Notice how the 0.382 retracement acted as support for SPY on the daily chart:
Despite early weakness, we noticed there was relative strength in the SOX index in the afternoon because when the S&P futures set new lows on several occasions, the SOX index actually held the prior lows, forming a higher low. When the market attempted to rally into the final fifteen minutes of trading, the SOX index also tracked higher, forming a “doji star” reversal pattern on the daily chart. If there is any strength in the market today, we expect the SOX index to lead the way.
Now that the UN assessment of the Iraqi weapons declaration is complete and Powell has addressed the material breach as being “nothing new,” we don’t expect there to be any more significant news about Iraq until sometime in the middle of January when Bush said he will address the issue. As such, I think the market may see a bit of a relief rally, especially when combined with the fact that the technicals were already in place for a strong rally yesterday morning and was fouled up only by the Iraq news. Even though history itself is not a reliable indicator that you can place reliable trades with, it is also worthy to note that the market rallies during the week before Christmas over 80% of the time. Keep in mind that today is “quadruple witching” options expiration day (because of the added expiration of the new single stock futures) and this is likely to add to the volatility. Nevertheless, we maintain a positive bias going into today. Just keep your share size small for the next several weeks.
Today’s watch list:
SMH – Semiconductor HOLDRS
Trigger = 23.35 (above yesterday’s close and the 40-MA on 15 min. chart)
Target = 24.40 (the high of Dec. 18, which is also the upper channel of the downtrend from the high of Dec. 2)
Stop = 22.85 (below the low of yesterday afternoon’s consolidation)
Notes = See our commentary above regarding the relative strength we noticed in the SOX index yesterday.
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 SPY short triggered, but we quickly covered and took profits when we noticed the divergence and strength in the SOX index, which often leads the way higher to a reversal. The BBH long did not trigger.
- SPY short (HALF position) –
Shorted 89.15, covered 89.08, points = + 0.07, net P/L = + $4
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