As I mentioned in the ETF Real-Time Room on Friday, last week was undoubtedly one of the most challenging trading weeks I have seen in my entire career. The week was plagued by tight trading ranges, light volume, false breakouts and breakdowns, and erratic intraday trend reversals that occurred without technical reason. Each of these factors contributed to the definition of an “untradeable” market. Thursday was probably the best example of an “untradeable” day because of the numerous false breakouts and breakdowns throughout the day. This can be best seen on the 5-minute candlestick chart of below:
Notice the numerous long wicks both on the top and bottom of each candle, as well as the false rallies and breakdowns. It would have been very easy to lose money in both directions on Thursday, but we remained in cash. Don’t be fooled into thinking that any of the micro selloffs or rallies were tradeable because the range of each move was so narrow and did not justify a positive risk/reward expectation.
Friday was the “best of the worst” trading day last week because the intraday downtrend remained intact throughout most of the day after the initial break of support. However, if we had not been so cautious by applying the MTG Opening Gap Rules, it would have been really easy to get sucked in on the long side due to the initial opening gap above the previous day’s high. Instead, we were patient and waited until we received multiple confirmation that the market was going to establish a steady downtrend. Unfortunately, most of the move had already occurred by that point, but we did realize a small profit on an intraday DIA short.
Friday’s opening gap above the previous day’s high and subsequent close below the previous day’s low formed a bearish engulfing candlestick pattern on the daily charts of each of the major indices. This is typically a very bearish pattern that leads to lower prices over the next several days. However, it is difficult to predict if there will be any follow-through because the daily charts remain oversold. Nevertheless, remember that oversold markets can remain oversold for quite some time and the trend on the daily charts is unquestionably down. But one also needs to factor in the overall risk/reward of entering new positions when so many conflicting signals exist.
The primary factor that is making the current market so difficult to trade is that we are in such a news-driven environment that technicals such as trendlines, support and resistance, and moving averages have all taken a back seat to any bit of news that comes out during the day. Because we are not psychics capable of predicting news before it happens, this makes it very difficult to capture any trends because news or rumors seems to hit as soon as we enter a clear trade setup.
Over the weekend, chief nuclear inspector of the UN, Mohamed ElBaradei, said that inspectors may be “seeing the beginning of a change of heart on the part of Iraq.” This is likely to be interpreted as a negative and will further add to the confusion because it could lengthen the amount of time required to see any sort of Iraqi resolution. The other thing that concerns me is that the mass media has been announcing loudly that “the markets will recover as soon as bombs start to fly.” This leads me to believe that the exact opposite will happen because everyone is expecting the market to get better when/if the war commences.
There are only two ways to trade the current environment in a low-risk manner. The first is to simply stay out of the markets and remain in cash until you see a clear, and I mean VERY clear, trade setup or technical signal. The second way to trade it is to “scalp” for tiny profits, which correspondingly requires even tighter stop losses. While this is an entirely different methodology than Morpheus Trading Group practices, some traders may find minimal success. Personally, I think it is a much better idea to just wait it out and preserve capital in the meantime. Trading drawdowns (losses) are inevitable in this type of market, so the key is to keep your losses tight and trade with reduced share size so that your capital losses from the losing trades does not exceed your net profits from the winning ones. Because you are likely to be wrong more than you are right in the current market, discipline to cut the losses quickly, without emotion, when you are wrong is a crucial element of survival.
Interestingly, this weekend marked one of the first occasions in quite a long time that I actually agreed with the mass media’s reporting of the market’s current trading action. The buzz in just about every major newspaper or financial magazine was that “geopolitical concerns are making it very difficult to profit in the market, even for short-term traders.” We couldn’t agree more! Let’s take it easy out there and remain patient so that you can live to fight another day!
Today’s watch list:
SPY – SPYDER (S&P 500 Index Tracking Stock)
Trigger = above 84.05 (break of downtrend from high of Feb. 5)
Target = 85.05 (upper channel resistance of downtrend from high of January 15)
Stop = 83.55 (below the break of trendline resistance)
Notes = We’ve got a little bit of an opening gap up going in the overnight futures market. If the gap holds into the 10 am reversal period, it could enable an uptrending day. We will be looking to buy on a break of the upper channel of the downtrend line from the high of February 5, which is loosely correlated to the 20-MA on the 60 minute chart.
Because of current market conditions, we are not very excited about listing multiple trade setups because there are not many good ones right now. However, in the unusual event that the market enters into a steady trend on good volume today, we will e-mail an alert for any additional trade setups we see. Otherwise, assume that Morpheus is remaining mostly in cash.
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).
Notes: The MDY short setup from Friday triggered and did eventually work out. However, we did not enter the position because we did not like the risk/reward by the time it triggered and confirmed the move in the late morning. We did short DIA for a small profit, but it is not reported here because it was a call made in the ETF Real-Time Room.
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