As we typically see after a strong trending day, yesterday was a range-bound correction day that enabled the major market indices to take a rest after Monday’s huge rally. Based on several overbought indicators, we expected a price correction down to the 0.382 Fibo support level, but more of a correction by time occurred instead. Like most range bound and choppy days, it was difficult to profit on either side of the market unless you were scalping for minimal profits. The usual plan on choppy days is to sit in cash and wait for a trend to be established, but we took a shot at a few trades yesterday when we saw a break of the lower channel trendline support from the lows of December 31. We shorted both SPY and DIA, the weakest of the major indices, when they traded below that trendline support. However, we were stopped out with small losses because the breakdown failed when strength in the Nasdaq, buoyed by Bush’s Economic Stimulus speech, dragged SPY and DIA back up. After the excitement of Bush’s speech wore off, the Nasdaq, which had been showing relative strength all morning, ran out of gas and formed a double top intraday. This spurred selling in the broad market, especially in SPY and DIA, both of which finally broke and stayed below trendline support going into the final thirty minutes of trading. After bouncing off the morning lows, both SPY and DIA closes in the lower end of yesterday’s range. The chart below shows you the trendline I am referring to:
Most impressive yesterday was the total market volume. For the first time since December 20, the Nasdaq total market volume closed above its 50-day moving average by trading 1.75 billion shares. The NYSE volume was also strong, coming in at 1.53 billion shares. As you may recall from the article I wrote on volume, the 50-day moving average is a key level I watch that usually indicates periods of sustained momentum. In other words, if volume remains above its 50-day MA over the next several days, the odds are increased of the recent rally being sustained. However, declining volume outpaced advancing volume yesterday, especially into the final hour of trading. This indicates we could see another period of price correction and selling before the market makes another leg higher.
Going into today, there is a good possibility we see continued selling pressure that began in the final thirty minutes of trading yesterday. We mentioned in the ETF Real-Time Room that we were taking HALF positions of SPY and DIA overnight short based on the break of trendline support. Because of the recent shift in market sentiment from “sell into rallies” to “buy the pullbacks,” we expect any selling pressure to be short-lived. An ideal stop on any shorts would be if they rally back above the former trendline support from the lows of December 31. Since former support becomes the new resistance level, index prices should find resistance at that trendline.
Unlike the past few sessions, we expect to see relative weakness in the Nasdaq today because the index has gotten ahead of the S&P and Dow and there were early signs of weakness into the close. The Gateway (GTW) profit warning after the close yesterday could also give pause to the recent tech rally. Remember that each of the major indices eventually create equilibrium, causing relative strength or weakness in individual indexes when one of them gets too far ahead or below the others. If the Nasdaq corrects today, it will make it difficult for the S&P and Dow to go anywhere either. Therefore, we could be in for another choppy and rangebound day. If a downtrend is established, we will be looking to cover shorts and considering going long around the 0.382 Fibo retracement levels on the major indices. This correlates to the high prices of January 3, and interestingly, the 200-MA on the 60-minute chart for SPY, DIA, and QQQ. So watch those 200-MAs on the 60-min. chart for an easy indicator as to where the indices are likely to find significant price support. Furthermore, any trends that develop in the morning (whether up or down) are likely to reverse in the afternoon, so be prepared for that as well.
Today’s watch list:
RTH – Retail HOLDRS
Trigger = above 70.40 (break of the two-day high)
Target = 71.95 (just below high of Jan. 2)
Stop = 69.70 (below yesterday’s close)
Notes = Though the Retail index has been a laggard during this rally, we will probably soon see money flow into Retail stocks due to sector rotation, especially if the techs are weak today. We will go long on a break of resistance.
QQQ – Nasdaq-100 Index Tracking Stock
Trigger = below 26.44 (break of trendline support from lows of Dec. 31)
Target = 26.04 (200-MA on 60 min. chart, which is also the 0.382 Fibo retracement of the rally)
Stop = 26.62 (resistance of upper channel of downtrend from yesterday’s high)
Notes = As you may have noticed, we are not looking for a large move to the downside with this setup and are risking less than 20 cents with our stop. We think the Nasdaq is going to see a small price correction today, but, as mentioned in the commentary above, selling pressure is likely to be short-lived. Therefore, we plan on taking profits quickly on the short side. Also remember the MTG gap rules.
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):
Per yesterday’s newsletter (which had the glitch with the wrong trade and chart setups), we entered PPH short at 77.60 and took it short overnight. We will be looking to cover PPH into any opening gap down. As mentioned in the e-mail MTG sent to you, you will receive a free day of service as a courtesy for the inconvenience.
- PPH short (HALF position from Jan. 7) –
shorted 77.60, stop lowered to 77.90,
open points = + 0.59, open P/L = + $30
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