After a small opening gap up yesterday morning, the Nasdaq quickly faded and broke the lows of the previous day. However, the S&P showed relative strength and went into a sideways trading range instead. Both major indices had recovered significantly by the end of the day with the S&P setting new intraday highs and the Nasdaq recovering most of its early losses.
Although the morning selloff in the Nasdaq was pretty rapid, the range was relatively narrow (QQQ only dropped 40 cents) and the Nasdaq bottomed by 11:00 am. The afternoon reversal attempt did not come as much of a surprise because it was the Nasdaq’s third consecutive day of a downtrend. Trends tend to run in periods of three days, meaning that there is usually some sort of correction or reversal in the opposite direction after three consecutive days in the direction of the trend. This is why we often say that the risk/reward of buying or selling short in the direction of the trend that is on its third day is not good even if the trend appears it will continue. That is why we did not short the Nasdaq yesterday, which worked out to be a wise move.
One thing that grabbed our attention yesterday morning was the vast divergence between the S&P and Nasdaq futures. While the Nasdaq quickly broke below the previous day’s low, the S&P futures held the prior lows with the exception of a brief probe around 11 am. This divergence was our first indication there was relative strength in the S&P and we began looking for the proper place to get long in the event the market reversed later in the afternoon. When the indices began reversing in the mid-afternoon, we got long both SPY and DIA, but did not enter QQQ due to its relative weakness. Although we had a solid profit buffer going into the final hour, the rally faded during the last fifteen minutes of trading, causing both indices to close near the breakeven point. We took HALF positions of both SPY and DIA overnight (per a call in the ETF Room) in anticipation of an opening gap today.
When doing our nightly research, we noticed some interesting observations on the weekly charts. While the S&P (SPY) and Dow Jones Average (DIA) have both broken below their 20-week moving averages, the Nasdaq-100 (QQQ) is still ABOVE its 20-week moving average. So, even though the Nasdaq has been showing relative weakness on a short-term basis, there is actually a more solid support base on a longer term basis due to the 20-week moving average just below. For QQQ, the 20-week MA is at 24.35, which is one cent below yesterday’s low. Funny how those key moving averages provide support and resistance with amazing accuracy! If it holds, the 20-week MA could provide support for the Nasdaq in the days ahead, so keep an eye on that key level.
Volume finally picked up a little bit yesterday, but it is nothing to write home about. The total volume in the NYSE was just over a billion shares, while volume in the Nasdaq checked in at 1.07 billion shares. Both of these numbers represent approximately a 35% increase over Friday’s volume. Volume will probably be lighter again today, but it should continue picking up after this holiday week is over. In this week’s issue of The Wagner Weekly, scheduled to be published later today, I will be writing about how we track volume on a daily and intraday basis, as well as the key volume levels we watch.
There is a Consumer Confidence number due out at 10 am EST today and that number could be a market mover because volume has been so light that any news, good or bad, can rapidly shift the direction of the market. Also, we incorrectly reported yesterday that the market closes at 1:00 pm today due to New Year’s holiday, but the market is actually open regular hours. Although it has closed at 1:00 pm on December 31 of prior years, such is not the case this year. The market, however, will be closed the entire day tomorrow for New Year’s Day and there will be no Wagner Daily tomorrow.
As the year draws to a close, I personally want to thank each and every one of our subscribers for their support during our first year in business. Since our launch in July, we have been growing faster than we ever imagined, which will enable us to continually expand our service offerings to you. None of this would have been possible without your business and we sincerely appreciate it! You have our word that we will continue working hard to provide you with a top quality product into the new year and to remain The Leader in ETF Trading! Have a safe and enjoyable New Year’s celebration!
Today’s watch list:
We are not listing any “official” trade setups today because we do not plan to take any positions overnight into the new year. However, for those of you who wish to participate in intraday trading today, we have the following trade ideas for you:
Financial Services Select SPYDER (XLF) formed a double bottom yesterday morning, but its daily and weekly charts both look precarious. A break below support at 21.85 could be a possible short, but the average daily range of XLF is narrow.
Retail HOLDRS (RTH) showed strength yesterday and closed near its highs. There is resistance at $70, but a break above that would indicate a break of its daily downtrend and could spur another rally today. Just be aware that RTH is not very liquid and often has wide spreads, so adjust your position size accordingly.
Semiconductor HOLDRS (SMH) was very weak yesterday and closed near its lows. Barring any kind of sector rotation today, we could see continued weakness in that sector. The daily chart looks pretty bearish and a break below yesterday’s lows could accelerate selling momentum.
After getting whacked for several days, the Biotechnology HOLDRS (BBH) is oversold in the short term. It attempted to bounce yesterday afternoon and could follow through with more upside today. A 0.382 Fibo retracement would take BBH up to around $87, nearly 2 points higher than its closing 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 gap rules kept us out of trouble yesterday and saved us a lot of money by preventing us from entering our long setups at the opening highs of the day. We waited for a minor retracement to support with SMH and bought a HALF position, but were stopped out with a small loss when the Nasdaq set new lows. We also bought a full position of DIA, sold half of it at breakeven, and took the rest of it overnight.
- SMH long (HALF position) –
Bought 23.03, stopped out at 22.85,
points = (.18), P/L = ($63)
DIA long (HALF position) –
Bought 83.33, sold 83.31,
points = (.02), P/L = ($4)
- DIA long (HALF position from Dec. 30) –
Bought 83.33, stop at 83.10,
open points = + 0.02, open P/L = ($1)
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 1 to 3 days once a position is
triggered. Updates on open positions are provided daily.
Yours in success,
Deron M. Wagner