After a large miss in the expectations of unemployment data in the pre-market on Friday, both the S&P and Nasdaq futures collapsed, causing both major indices to open at the previous day’s lows. Although the economic report was pretty bad, we were more inclined to watch for a reversal in the market rather than to short the gap down, which would have been risky given the recent bullish sentiment of the market. Not surprisingly, the market quickly recovered off the opening lows and “filled the gap” from the previous day’s close. When the reversal confirmed its strength by setting new highs after the 9:50 am reversal period, we bought SMH (the Semiconductor HOLDRS) per a call in the ETF Real-Time Room because it was showing the most relative strength. The rally was quite strong in the morning and not only filled the gap, but also caused the major indices to break above the highs of the previous day. However, the breakout failed upon entering the mid-day doldrums at 11:30 am EST, at which point the market began showing weakness which eventually led to an intraday retracement of more than 50%. The severe retracement prompted us to sell most of our long positions going into the early afternoon. The 15-minute chart of SPY below illustrates these levels:
When a sector or index is trading the middle 30% of its intraday range, that is what Morpheus Trading commonly refers to as “the danger zone.” If the sector or index is trading in the upper 35% (approximately 0.382 Fibo retracement) of its range, odds are good that an uptrend will continue and new highs will be set. If prices are trading in the lower 35% of its range, any downtrend is likely to continue and lead to new lows. However, when the price of an index is in the middle 30% of its intraday range, it often becomes a high-risk gamble as to which way prices will go; hence the name “danger zone.” When prices enter this “danger zone” we typically look to close out both long and short positions because reversals can happen rapidly and sharply. We often set our stops just above or below the 50% intraday retracement level because if an index or sector retraces more than 50% in the opposite direction of the trend, odds are that a reversal usually follows and the loss will only get worse. Look for an MTG mini-lesson on the “danger zone” in the near future.
As you can see, the major indices entered into a choppy trading range for the remainder of the day after trading down into the “danger zone.” This significantly increased the risk of entering new long positions in the afternoon unless you were just scalping for a tiny profit.
Last week’s closing prices in the major indices positioned the broad market for a breakout to higher prices this week. This is because price resistance of last week’s highs was tested two to three times on each of the major indices. With each subsequent test of resistance, it becomes more likely that a breakout to new highs will be sustainable. As of the time of this writing, there is a pre-market gap in the futures that would cause the major indices to each open above the highs of last week, assuming the gap holds into the open. Whether it does or not, last week’s highs are going to either serve as resistance or support, depending on where the market opens. If the open is above last week’s highs, those levels should serve as price support. If, however, the opening prices are below last week’s highs, expect to see continued resistance at those levels. The key pivot points to watch as either support/resistance on each of the major indices are as follows: SPY 93.50 – 93.60, DIA 88.25 – 88.35, QQQ 27.10 – 27.20.
Finally, and most importantly, remember to watch the powerful weekly charts for signs of a significant rally that could actually be sustainable this time around. Particularly, watch QQQ for a rally above the upper channel resistance of its downtrend line which started back in the middle of 2001. Take a look:
If the above trendline on QQQ is broken, it will be the first time in over 1.5 years and could lead to substantially higher prices in the Nasdaq. However, that same trendline resistance is a bit higher on SPY and DIA. There are no economic reports that could shock the market today, so just watch the key pivotal levels mentioned above.
Today’s watch list:
SMH – Semiconductor HOLDRS
Trigger = above 25.93 (break of Friday’s high)
Target = 27.35 (high of December 5)
Stop = 25.30 (below Friday’s close)
Notes = The Semiconductors showed strength on Friday, but the market did not cooperate in the afternoon in order for SMH to sustain a breakout. We also like the ascending triangle formation which can be seen on a 60-minute chart.
SPY – SPYDERS (S&P 500 Index Tracking Stock)
Trigger = above 93.70 (above Friday’s high)
Target = 95.45 (200-day MA resistance)
Stop = 92.90 (just below Friday’s close)
Notes = If SPY breaks last week’s high, it will probably rally right up to the 200-day MA without much resistance. Just remember the MTG gap rules.
Daily Reality Report:
Trades from The Wagner Daily only (ETF
Intraday Real-Time Room trades reported separately on a weekly basis):
(will be reported in separate email today)
- RTH long (full position from Jan. 8 and Jan. 10) –
bought 71.18 (avg.), will set stop and send e-mail alert after open,
open points = + 0.52, open P/L = + $49
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