Commentary:
Many of the major market indices, as well as individual sectors, finally lost daily price support on Friday after trading in a narrow and choppy range for the past several weeks. Despite amazingly low volume, especially in the Nasdaq, Friday morning began in a downtrend that lasted the entire day. This marked the first time there was intraday follow-through in a trend for more than an hour or so. Because of the market’s recent inability to maintain an intraday trend and the extremely thin trading volume, we were in PMC (Preserve My Capital) mode and chose not to participate in Friday’s trading session. Nevertheless, it was nice to finally see some intraday price follow-through. Both SPY and DIA, as well as sector ETFs such as OIH, BBH, and PPH all lost price support on their daily charts.
The reason that we talk about volume so much is because it is the most important technical indicator other than price. However, it also tends to be the one indicator that many novice, and even experienced traders, often forget about. Because volume is usually a leading indicator to price, thin trading volume tends to create choppy markets and causes trends to reverse easily. This is because it only takes a small amount of buyers or sellers jumping into the market to move prices in the opposite direction. However, once those buyers or sellers are done, prices will often revert back to where they previously were, thereby causing a lack of follow-through and choppy conditions. Friday’s thin trading volume did not confirm the break of price support on the daily charts. It simply indicated a lack of buyers rather than an abundance of sellers, which is why we chose not to participate in shorting the selloff. It is usually not a good risk to enter new positions when broad market volume is very light.
On the other hand, average or heavy volume often causes trends to form and enables the market to follow-through. Even if a small group of sellers jump into the market during a high volume uptrending day, the uptrend will usually continue because there are enough buyers to absorb the selling volume. If you have ever watched an individual stock trend up the entire day without even a minor pullback even when the market was weak, chances are that the stock was probably trading on very high volume that day, which enabled the stock to maintain its price even when sellers stepped in. The same thing is true of downtrending indexes or stocks in that the downtrend is more likely to continue if the selloff if on heavy, or at least average, volume because it indicates there are enough sellers to continue the downward momentum even if some buyers step in.
The total volume in the Nasdaq Friday was a mere 807 million shares, which was even less volume than the prior day’s multi-year low trading volume of 815 million shares. The NYSE volume on Friday checked in at 751 million shares, slightly higher than the previous day’s volume of 710 million. The market is closed on Wednesday for the New Year’s Day holiday and closes at 1:00 pm EST on Tuesday of this week. Because many traders and investors are still on vacation, we don’t expect to see much of an increase in market volume until January 6. Therefore, we remain in PMC mode today unless the market gives us a compelling reason not to be.
Even though SPY and DIA broke support and closed at prices not seen since mid-November, QQQ (the Nasdaq-100 Index), SMH (Semiconductor HOLDRS), and SWH (Software HOLDRS) managed to hold support and close above the lows of December 19. So, besides a lack of volume confirmation, there was also price divergence between the S&P and the Nasdaq that could serve to prop up the market this week unless the Nasdaq also breaks support. The charts below illustrate the price divergence between SPY and QQQ on their daily charts:
Going into today, we will be watching two things: broad market volume and price divergence between SPY and QQQ. If QQQ breaks the December 19 lows, that could trigger another selloff in the broad market, perhaps on heavier volume this time. However, if QQQ holds those lows, it is just as probable that SPY will bounce off of Friday’s lows, especially if volume picks up a little. Overall, we’re not really excited to trade today because of the continuation of mixed signals we are seeing. However, trading conditions will probably improve as volume returns to the market after the new year. Until then, we see no reason to be in a hurry to enter the markets.
Today’s watch list:
DIA – DIAMONDS (Dow Jones Industrial Average Tracking Stock)
Long
Trigger = 83.45 (above the upper channel of the 2-day downtrend, which is also the 20-MA/15 min.)
Target = 84.45 (resistance of the Dec. 24 low, which is also the 20-MA/60 min.)
Stop = 82.93 (below Friday’s close)
Notes = Remember the gap rules before entering this one.
SMH – Semiconductor HOLDRS
Long
Trigger = 23.10 (above the upper channel of the 2-day downtrend, which is also the 20-MA/15 min.)
Target = 23.95 (next major whole number price resistance)
Stop = 22.80 (below Friday’s close)
Notes = Remember the gap rules before entering this one.
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 weakening broad market caused the BBH breakout to fail and we were stopped out in the rest of our position. Fortunately, we sold half of our position before it hit the stop on Thursday. We also had our stop in just the right place because BBH dropped nearly two more points below our stop on Friday.
Closed
Positions:
- BBH long (HALF position from Dec. 23) –
Bought 90.45, stopped out at 87.75,
points = (2.70), P/L = ($137)
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 1 to 3 days once a position is
triggered. Updates on open positions are provided daily.
Yours in success,
Deron M. Wagner