The major indices each began yesterday morning with a gap up above the previous days highs. After consolidating near the highs into the reversal period from 9:45 am to 10:00 am, the indices rallied to set new intraday highs which set into motion an impressive uptrend that provided no additional low-risk entry points the entire day. The rally was broad based and nearly every sector we follow closed in the positive. The only sectors that closed in the red were Oil Service (OIH) and Gold (GOX index, no ETF). This represented sector rotation and a shift out of some defensive sectors and into more aggressive sectors such as Semiconductors (SMH), Networkers (IAH), and Telecoms (TTH), each of which closed up more than five percent on the day.
Monday’s rally was an example of how well indices typically follow-through in continuation of the pattern I spoke about yesterday in which there is a large trend day, followed by a narrow range consolidation day, and then follow-through with another trend day. The technical pattern in the market was also aided by news of Bush’s economic stimulus package that includes reducing taxes corporations pay on dividends. This also explains why Utilities (UTH) were so strong yesterday.
We sold our SMH and QQQ long positions that we took over the weekend for a nice profit yesterday morning. Although we typically use trailing stops to maximize profits, I made a judgment call yesterday morning to take profits on the remaining shares because I was not convinced the market would hold onto early gains as the market began deliberating around 10:00 am EST. Obviously, I was wrong because the market subsequently broke the morning highs and never looked back for the rest of the day.
One interesting thing about strong trending days such as yesterday is that a large percentage of professional traders are often left in the dust on the first solid rally day because that type of market action dictates a paradigm shift in position management. Throughout the month of December, most of the strong opening gaps were followed by a feeble attempt at a rally and then a collapse that led to choppy and range bound trading. Because it was rare for any type of rally to be sustained in December, traders such as myself were required to shift into a more conservative mode of trading that necessitated reduced share sizes and much quicker profit taking. Trailing stops were not effective last month because of the choppiness in the market, so we typically took profits quickly without waiting for a trailing stop to be hit. Now, here we are in January, still in a conservative mode of trading that was necessary in order to protect capital last month, and all of a sudden the rallies are sustained, and even more interesting, yesterday’s rally did not provide any low-risk entry opportunities after 10:00 am because there were not any significant pullbacks. To chase yesterday’s rally would have been risky because there still was not much indication that the tide has turned, which does not become evident until after the rally has already occurred.
Now that we see that overall market sentiment has shifted, we too have shifted our mode of thinking into one of being a little more aggressive on the long side and using trailing stops to ride out profits longer. However, the next couple of days could be tricky because trading is typically choppy and range bound after a large rally like we have seen. There were a lot of companies that released positive earnings reports after the close yesterday and even raised guidance. This indicates that the January rally we are seeing may actually have legs. Nevertheless, tensions are continuing to increase with North Korea and the market could still reverse in the blink of an eye. While I remain much more optimistic about the month of January than I did just a few days ago, it would be foolish to be blindly bullish at this point.
Today’s watch list:
PPH – Pharmaceutical HOLDRS
Trigger = below 77.95 OR above 78.40 (below price support or gap up to yesterday’s high)
Target = 76.50 (0.382 Fibo pullback off the rally)
Stop = 79.05 (above yesterday’s high)
Notes = This is a fade candidate as we are playing it for a pullback to support. Just got a bit ahead of itself.
In addition to PPH, we also want to watch for short entries in SPY and DIA. Although we don’t expect them to give back all their gains, they are a bit overbought now and we could see a price correction down to 0.382 Fibo support. However, it is too tricky to list exact target prices here because it depends on whether they gap or not. Ideally, we would want to see a gap up to yesterday’s high and short the gap up.
Daily Reality Report:
Click here for an explanation of how our daily trade performance is reported.
Trades from The Wagner Daily only (ETF
Intraday Real-Time Room trades reported separately on a weekly basis):
In addition to closing QQQ and SMH for a profit, IWM also triggered yesterday morning. However, per an intraday email alert, we made the decision not to enter it because it was showing relative weakness to the broad market by failing to set new intraday highs as both SPY and DIA did. If you entered it when it triggered, you made a profit because the trade eventually worked out. But, we will not count IWM in our stats because we never officially bought it.
- SMH long (HALF position from Dec. 3) –
Bought 23.71, sold at 24.64 (avg.),
points = + 0.93, net P/L = + $135
QQQ long (HALF position from Dec. 3) –
Bought 25.49, sold at 25.94,
points = + 0.45, net P/L = + $84
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