The major indices finally bounced yesterday as QQQ, SPY, and DIA all traded in sync with each other and rallied steadily from mid-afternoon into the close. As we were expecting, relative strength finally shifted back into the SPY (the S&P) and the Dow (DIA) which, unlike the previous two trading days, allowed the market to close near the highs. The market was unable to close near the highs during the previous two days due to divergence between the S&P and Nasdaq. However, when all the indices are trading in sync with each other, it enables the market to maintain any trends that develop. The fact that the three major indices were all showing equal relative strength is what allowed the market to close on its highs.
The key to a profitable trading day yesterday was to be patient and disciplined to wait for the right confirmation. After testing the waters by buying SPY on a small pullback after the opening gap up, we were stopped out when the S&P quickly lost support and dropped to the previous day’s low. However, because we were disciplined and kept a tight stop, we only lost 25 cents on the trade. Based on the market’s oversold condition, we stayed in cash for the next several hours rather than selling short. We then determined where the resistance levels were on SPY and DIA and set buy stop orders to go long on a break of those resistance points in the event of an afternoon reversal. By early afternoon, our buy stops got triggered and we bought both SPY and DIA when they traded above their 40-MAs on the 15 minute charts. This also correlated to a break of the upper channel resistance of the downtrend line from the highs of January 16. After buying SPY and DIA, we used trailing stops to lock in profits and eventually sold both positions into the close, near their highs of the day. We based our sell targets on resistance of the previous day’s highs, which is exactly where the rally stopped. This netted us approximately 50 cents profit in each trade, giving us a net profit of about 0.75 points for the day through the sum of three trades. By simply being disciplined to quickly cut the losing trade and patient enough to wait in cash until the proper setups presented themselves, we avoided getting chopped up in the late morning trading range and turned a small losing day into a rather profitable one. The 15-minute chart of SPY below illustrates our trade entries and exits that were made by Morpheus and called in the ETF Real-Time Room yesterday:
Although the market closed strong at 4:00 pm EST, selling came after hours and caused both the S&P and Nasdaq futures to drop significantly into the range of the mid-afternoon rally. This means that there is now resistance of yesterday’s highs going into the open today. However, the more important resistance level the market has to contend with is the resistance of the trendline that was recently broken on the daily charts. If SPY attempts to rally above yesterday’s highs, it will quickly be faced with that trendline as shown below:
Remember that yesterday was just a bounce in the course of a multi-week downtrend. Unless the market proves it can maintain a break above the downtrend line from the highs of mid-January, we need to assume the downtrend will continue, or perhaps the market will trade sideways for a while. In the short term, look for support of the 20 and 40-MA on the 15 minute chart. In order for yesterday’s rally to hold, those levels need to hold. Also remember that major geopolitical factors still loom and nothing has changed in that regard. Therefore, don’t get too caught up in either side of the market yet and continue to remain prepared for choppiness and indecision. If you are patient and disciplined in your trading approach, you can wait for the proper setups to present themselves and maintain profitable days regardless of what the market does. Overtrading in the current environment is nearly certain to result in losses.
Today’s watch list:
PPH – Pharmaceutical HOLDRS
Trigger = Above 74.80 (above resistance of downtrend line)
Target = 75.70 (resistance of the 20-day MA)
Stop = 74.35 (below yesterday’s close)
Notes = Pharmaceutical sector is oversold and we are just looking to play a bounce on confirmation of a break of trendline resistance.
Daily Reality Report:
Below is Morpheus Trading Group’s daily performance report of closed trades and an update on all open positions from The Wagner Daily (ETF Intraday Real-Time Room trades are reported separately in The Wagner Weekly).
A separate email will be sent later today with trading results of closed positions of past two days.
Notes: A separate email will be sent later today with trading results of closed positions of past two days.
Click here for a detailed explanation of how daily trade performance is calculated.
Click here for a detailed cumulative report of MTG’s trading performance (updated weekly)
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