The price correction we have been expecting came yesterday in the form of a gap down, inability to fill the gap, and a slow bleed down for the rest of the day. When the major indices gapped down in the morning, we used the MTG gap rules to lock in profit on half the shares of our overnight short positions in SPY and DIA (from the ETF Real-Time Room) and set a trailing stop just above the 5-minute high on the rest of the shares. Although the major indices consolidated near the lows for the first hour,the S&P futures reversed and set a new intraday high by mid-day, hitting our trailing stop on the rest of our shares. However, the S&P’s breakout attempt was cut short by the relative weakness in the Nasdaq, which prevented the S&P and Dow from sustaining their upward biases. When the S&P futures traded above the morning highs around mid-day, the Nasdaq barely managed to bounce before setting new lows and continuing lower. This was due to the sector rotation we discussed yesterday morning in which we expected money to flow out of tech stocks and into some of the more “old economy” sectors such as Utilities, Oil, and Retail, all of which showed relative strength yesterday.
Being short yesterday afternoon after the initial morning selling would have been high-risk unless you were just scalping for small profits. This is because, despite the downtrending day, the range of the selloff was relatively narrow and on light volume. When you see this type of “slow bleed,” reversals can come quickly and prices reverse sharply. In addition, the selloff brought the all the major indices down to price support of the 0.382 Fibo retracement of the January rally. Fibonacci is really amazing sometimes, as evidenced by the fact that yesterday’s lows in SPY, DIA, and QQQ all correlated with a 0.382 Fibo retracement. To learn more about Fibonacci, you can read a recent article I wrote by clicking here. The charts below show how each of the major indices found support at the 0.382 level:
Even more amazing is how often the 200-MA lines up with a Fibo retracement level. In the case of the indices above, note how the 200-MA on the 60-min. chart perfectly lines up with the 0.382 Fibo level. This is called Fibo/moving average convergence and typically provides a solid support (or resistance) level. The more convergences, the more significant the support or resistance. Given the recent bullish tone in the market, it would have been risky to assume the market would see a more significant correction than the 0.382 Fibo levels yesterday. When broad market sentiment changes, as it did in the beginning of January, price corrections tend to be short-lived and morning price corrections (such as yesterday’s downtrend) often reverse in the afternoon. Given all these factors, we did not like the risk/reward ratio of being short yesterday afternoon, although we did manage our overnight short positions well and made some nice profits in the morning.
Despite the QQQ short setup yesterday, we chose not to enter it after it traded below the twenty-minute lows because the morning selloff significantly reduced the risk/reward ratio to being unfavorable. Because the low of the first twenty minutes was around 26.30 and our price target was only 26.04, it would have been a substantial risk in order to capitalize on just a 25 cent potential profit. QQQ eventually hit our downside price target yesterday, but we were pleased with our decision to not enter because the reversal could have easily happened. We also found it interesting that yesterday turned into another trending day because that means 3 out of the last 5 trading days were trending. Because we typically only see a solid intraday trend about once per week, we expected yesterday to be more of a choppy, range-bound day rather a downtrending one.
Most of the major indices are now sitting at pretty significant price support on their daily and intraday charts. Therefore, we expect an upward bias in the broad market today, especially in the Nasdaq, which began showing relative strength yesterday afternoon. It’s important to note that the Dow (DIA) is sitting on its 50-day MA and the S&P (SPY) is just above it. If this January rally is going to be sustained, we would expect to see the Dow and S&P to hold above these levels. All these technical indicators leave me to believe that caution is in order with any shorts you are positioned in.
Today’s watch list:
DIA – DIAMONDS (Dow Jones Industrial Average Tracking Stock)
Trigger = above 86.30 (above upper channel of downtrend from Jan. 7 highs)
Target = 88.05 (just below Jan. highs)
Stop = 85.70 (just below yesterday’s low)
Notes = As explained above, the Dow is at support of its 0.382 Fibo retracement, 50-day moving average, and 200-period moving average on 60-minute chart. Good risk/reward on this setup. Just remember the gap rules.
QQQ – Nasdaq-100 Index Tracking Stock
Trigger = above 26.15 (above upper channel of downtrend from Jan. 7 highs)
Target = 26.80 (just below Jan. highs)
Stop = 25.85 (just below yesterday’s close)
Notes = Similar play to DIA above.
SPY – SPYDERS (S&P 500 Index Tracking Stock)
Trigger = above 91.65 (above upper channel of downtrend from Jan. 7 highs)
Target = 93.20 (just below Jan. 7 high)
Stop = 90.95 (just below yesterday’s low)
Notes = Similar play to QQQ and DIA above.
Daily Reality Report:
Trades from The Wagner Daily only (ETF
Intraday Real-Time Room trades reported separately on a weekly basis):
We closed out the PPH overnight short for a profit yesterday morning due to relative strength on the open. As explained in the commentary above, we did not enter QQQ short yesterday. We did, however, enter RTH long due its early relative strength. Although it weakened and hit our initial stop in the afternoon, we adjusted the stop down slightly to give some leeway to the wide spread of RTH. Same-store sales reports that are being released this morning will likely create a relief rally because everyone is already expecting the numbers to be poor. Assuming none of the retailers totally miss expecations, we expect a resumption of yesterday morning’s early strength. MTG will e-mail you an alert with our new stop price once we see where RTH opens today.
- PPH short (HALF position from Jan. 7) –
shorted 77.60, covered at 77.13 (avg.), points = + 0.47, net P/L = + $22
- RTH long (from Jan. 8) –
bought 70.27 (avg.), will set stop and send e-mail alert after open,
open points = (0.87), open P/L = ($88)
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