Despite a clear technical trigger point in the morning, yesterday ended up being yet another volatile, roller-coaster style day that closed right where it opened. In fact, I would venture to say that yesterday was the most erratic day we’ve seen during the daily trading range of the past two weeks. The day began with SPY (S&P 500 Index) selling off and breaking below the 84.15 low of the past two weeks’ trading range during the first thirty minutes of trading. While a break of a multi-week trading range would normally signal a clear and low-risk trade setup to sell short, the unstable nature of the current trading environment caused SPY to quickly rally back up into its previous trading range shortly after breaking down. When we saw this erratic price action, we immediately made the decision to close all our open positions before they hit our stops and went to cash because it was obvious the market was going to once again be highly unpredictable and new-driven for the remainder of the day. By the end of the day, we were happy with that decision because the markets remained in a very narrow trading range until 3:00 pm. Going into the final hour of trading, the market once again began acting erratic as SPY sold off sharply to the lows of the morning, formed a double bottom, and just as quickly rallied back up to to near the high of the day. Cash was clearly the best position yesterday, and we used discipline to stay in cash after “testing the waters” and quickly realizing that conditions were not conducive to trading. The 5-minute chart of SPY below illustrates yesterday’s strange price action:
As mentioned, SPY briefly probed below the lows of the daily trading range, but it did not stay down there for long. DIA also barely probed below the lows of the trading range. The daily chart of SPY below illustrates where SPY briefly broke below two weeks of price support and almost immediately recovered to close where it opened. Also take note to the multiple candlesticks with narrow bodies and long wicks that indicate confusion and indecision over the past week:
QQQ had relative strength to SPY and DIA today and actually formed a double bottom and held the lows of the trading range. Looking at the daily chart of QQQ below, you can see the divergence between SPY (above) and QQQ because QQQ never broke the lows:
I hate to sound like a broken record, but the bottom line is that the market is almost exclusively news driven right now, rendering technicals largely invalid. While it is not common for markets to be so news driven that it overrides technicals, it is important to identify those periods in the market and step aside. If you fail to recognize the change, you will lose a lot of money by continually trying to apply the methods that were previously successful and expecting to achieve the same results. Until further notice, we are basically in SOH (Sitting On Hands) mode. There are several key employment reports due out at 8:30 am EST today, including Unemployment Rate, which have the potential to be market movers. But until we see some resolution with the Iraq situation (and possibly North Korea now), we expect the market to remain skittish and essentially untradeable.
Today’s watch list:
MDY – MIDDIES (S&P Mid Cap Index Tracking Stock)
Trigger = below 74.50 (break below the two-week trading range)
Target = 73.20 (lower channel support of daily downtrend)
Stop = 75.10 (above yesterday’s close)
Notes = MDY has been showing relative weakness to the rest of the major indices and closed weaker than the rest after briefly breaking support before the close. However, we are not very excited about this play given the recent lack of follow-through in the market. IF we do enter this trade, it will be with minimal share size.
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).
QQQ short (HALF position from Feb. 6) –
Shorted 23.93, covered 24.08, points = (0.15), net P/L = ($36)
BBH short (from Feb. 6) –
Shorted 86.19, covered 86.69,
points = (0.50), net P/L = ($53)
Notes: As mentioned in the commentary above, we made the decision to close both of our open short positions nearly immediately after we entered them rather than trying to fight the erratic market conditions. This enabled us to keep our losses small because the market sharply rallied after we covered the shorts. Just like February 5, we prevented substantial losses through tight position management.
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