Although the major indices began the day with a small opening upside gap and subsequent consolidation that appeared like it would provide follow-through on Wednesday’s rally, the market entered into a whippy trading range during the morning before eventually losing support of Wednesday’s uptrend line going into the mid-day doldrums. By 12 noon EST, both SPY (S&P 500 Index) and QQQ (Nasdaq-100 Index) had broken below their respective 40-period moving averages on the 15 min. chart, an important level that often indicates intraday trend reversals once broken. The break of the 40-MA put the major indices in the middle of Wednesday’s trading range, which is where one might have expected the market to remain for the rest of the day. However, through the use of Fibonacci, one was able to predict the likelihood that a break to new lows was more likely to occur than a rally back up to the morning highs ( Click here for a primer on Fibonacci).
As we have often discussed in the past, a healthy uptrend would normally expect to see a 0.382 Fibonacci retracement. In fact, this is the level where we often look to re-enter long positions because indices usually find support near this level. Sometimes indices will retrace beyond the 0.382 level and drop down to the 0.50 level, which slightly decreases the odds of a rally back up to the highs because of the additional overhead supply (resistance) that is created. However, if an index drops below the 0.50 level, odds are greatly reduced of a rally back to the highs and the likelihood of a trend reversal altogether is greatly increased. In the case of yesterday, the drop going into 12 noon put SPY between resistance of the 0.50 level overhead and above support of the 0.618 level. Because of the severity of the retracement, odds were increased that a break to new lows would follow later in the session (which it did). But if the drop would have only been to 0.382 or 0.50, the market would have technically had a much better chance of rallying back up into the late afternoon session rather than selling off. Notice how SPY sat on the 0.618 level before breaking to new lows on the chart I have labeled for you below:
As you can see, SPY eventually broke support of the 0.618 level and actually sold off to set a NEW LOW for the week! While we were not surprised to see the weakness in the market yesterday afternoon, it was a bit surprising to see that the lows that have been forming over the prior three days failed to provide any support. In fact, there was not even a bounce going into the close. This means that SPY closed at a new low for the year, closing at low price not seen since October 14. DIA (Dow Jones Industrial Average) also closed at a new low for the week, but QQQ just barely held the lows into the close.
From a technical basis, yesterday’s broad market selloff increases the likelihood that the October lows will probably be tested during the next several months. In fact, there is a strong possibility that new lows will be set because there are no technical reason buyers are likely to step in. When the market cannot even sustain a bounce for more than one day after two consecutive weeks of selling, this is bound to create some major technical problems for the major indices.
Given yesterday afternoon’s price action, it would be unwise to be bullish going into today because SPY and DIA have now violated major support levels and QQQ is not far behind. However, I would also not be looking to aggressively short the current price levels without some sort of a bounce first because the selloff was so severe yesterday that the market is now due for at least an intraday price correction. At the least, I would look for a retracement up to the lows of January 29 which should now act as resistance. This equates to just below 85 for SPY and around 79.60 for DIA (QQQ held the Jan. 29 lows). Ideally, I would like to see a retracement up to the 20-MA on the 15 min. charts because that would provide a lower risk entry on the short side. However, it is unclear whether the market has enough strength to bounce that high and it may instead correct by time rather than price. A correction by time means that the market would trade sideways, consolidating at the lows, which would allow the moving averages to eventually come down to meet the price without seeing a bounce. As usual, the best way to play the short side is probably to scale in to your shorts, adding to partial positions each time you see more confirmation or ideal entry points.
Today’s watch list:
QQQ – Nasdaq 100 Index Tracking Stock
Trigger = below 24.35 OR above 24.70 (low of the past week OR a bounce into resistance)
Target = 23.25 (0.618 Fibo retracement from lows of October to highs of December)
Stop = 25.10 (above price resistance of the week)
Notes = Although the Nasdaq has been showing relative strength to the S&P and Dow during the selloff over the past several weeks, the Nasdaq is now poised to catch up to the other indices if it breaks to a new low of the week. We expect to see some rotation out of the Nasdaq and into the “old economy” sectors.
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).
SWH short (HALF position from Jan. 30) –
Shorted 28.73 (avg.), covered 28.25,
points = + 0.48, net P/L = + $45
RTH long (from Jan. 30) –
Bought 67.48 (avg.), sold 66.66 (avg.),
points = (0.83),net P/L = ($86)
SWH short (HALF position from Jan. 30) –
Shorted 28.73 (avg.), will set new stop and email alert after open,
open points = + 0.84, open P/L = + $81
Notes: We shorted SWH yesterday, covered half for a profit before the close, and took half overnight. RTH started out with relative strength yesterday, but lost support when the market collapsed. Fortunately, our stop loss kept the loss small. We also shorted SMH in the ETF Real-Time Room yesterday for a profit (details will be reported in Wagner Weekly ).
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