Despite the triple digit rally in the Dow Jones Average yesterday, 90% of the gain was the result of a large opening gap up and immediate rally within the first 20 minutes of trading. As you probably are aware, the MTG Opening Gap Rules are designed to prevent us from getting stuck buying the high of an opening gap that fails because the rules mandate waiting until a break of the 20-minute high is established before going long. However, because the market gapped up and moved so sharply on the open, the risk/reward of buying after the first 20 minutes without some sort of correction was not a good risk.
After the first thirty minutes of trading, each of the major indices corrected by time and remained in a very narrow sideways range for most of the day until sellers came into the market around 3:00 pm EST. As such, we did not spot any low-risk long entries other than one quick scalp on DIA because there was no trend after 10 am EST (with the exception of QQQ, which barely set new highs throughout the afternoon). The chart of DIA (Dow Jones Average) below clearly shows the mostly sideways trading action in a narrow range after the first 30-minutes of the day until the final hour:
The bottom line is that most of the profits to be made yesterday were only realized for traders who had long positions over the 3-day weekend. We were flat over the weekend because we did not like the risk of being in any positions over the 3-day holiday weekend because we felt that too many negative world events could occur during that period. While intraday trending markets like we had on February 13 and 14 are great for intraday traders, gap days such as yesterday are great for overnight “swing” traders. Although it is too early to tell, the possibility exists that the market may enter into a short-term trend that is conducive for the “swing” trades that is typically the focus of The Wagner Daily. Through the end of last week, we have been a bit light on the overnight trades lately only because the market has not been following through into the next day.
One thing that set off a “red flag” with regard to yesterday’s trading was the extremely light volume in the NYSE yesterday. The total market volume for the NYSE yesterday came in at 1.17 billion shares, about 13% lower than the previous day’s volume and 10% BELOW both the 5 and 50-day moving averages for total market volume. Volume on the Nasdaq was slightly better, but still came in below its 50-day moving average. Interestingly, yesterday’s total market volume on the NYSE was the second lightest day of the year, behind January 3. While the light volume could probably be attributed to the snow storm in the Northeast, it is something we want to keep a close eye on today because it could be an early indicator to us that yesterday’s rally was nothing more than the result of a lack of sellers rather than an abundance of buyers. The light volume also explains how the market was able to sell-off below intraday support and then just as quickly reverse back up to the highs during the final 15 minutes of trading (see chart above). Other than price, remember that volume is THE MOST IMPORTANT technical indicator and is usually a leading indicator to price direction.
Going into today, bear in mind that we have had three consecutive uptrending days (including yesterday’s consolidation day) and trends rarely go more than three days in a particular direction without seeing a correction before resuming the trend. Although yesterday could be considered a correction day because of the sideways trading, the major indices still remain well above the lower channel support of the trendline from the low of the February 13 reversal day, as well as the 40-MA on the 15 min. chart. In addition, the major indices are still well above the 0.382 Fibo retracement level off the most recent rally. The chart of SPY below illustrates the intraday support levels:
Aside from the intraday charts, many of the daily charts are running into moving average resistance as well. In particular, QQQ closed at resistance of both its 50 AND 200-day moving averages, which have converged together. Take a look:
Because daily moving averages are more powerful support/resistance levels than intraday moving averages, it is doubtful that QQQ will easily break through its 50 and 200-day MAs on its first attempt. While SPY and DIA are still well below their 50 and 200-day MAs, they both closed slightly above their 20-day MAs. IF yesterday’s rally holds, we expect the 20-day MAs to act as support. But if the rally fails and the market retraces today, the 20-day MAs will again become resistance. Either way, keep a close eye on those daily moving average support/resistance levels today.
Today’s watch list:
DIA – DIAMONDS (Dow Jones Industrial Average)
Trigger = HALF below 80.53, HALF below 80.15 (half below below 20-MA/15 min.; add half below 40-MA and uptrend support line from Feb. 13)
Target = 79.30 (0.382 Fibo support level)
Stop = 80.92 (above yesterday’s close)
Notes = If the Dow breaks below yesterday’s intraday support, it could trigger a selloff down to its 0.382 Fibo support level off the rally from the Feb. 13 lows. We will short half on first break and add half position when we get more confirmation.
RTH – Retail HOLDRS
Trigger = above 67.60 (above yesterday’s high, daily trendline resistance, AND 200-MA/60 min.)
Target = 69.10 (resistance of 50-day MA)
Stop = 66.75 (below yesterday’s close)
Notes = Retail index began showing relative strength yesterday and acted very well. This sector may be finally starting to see some positive money flow due to sector rotation. It closed right at resistance of daily trendline resistance (see chart above), but a break above that trendline will likely spur another leg higher. High volume also confirming yesterday’s rally.
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: Although the SMH setup from yesterday actually hit our profit target of 22.95, we were not provided with a low-risk entry point on the long side because of the opening gap up. We only made one trade yesterday in the ETF Real-Time Room and the profit will be reported in the next 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