Commentary:
Each of the major indices began the day yesterday with a large opening gap down below support of the previous week’s lows. Because the gap down was so severe, we used the MTG Opening Gap Rules to allow the market to settle into the first reversal period before entering any positions, long or short. The market confirmed this was the correct move to make because the reversal off the opening lows came right on schedule going into the 10:00 am EST reversal period.
By the time the bounce came, we were already prepared with a game plan (which we discussed in the ETF Real-Time Room) that called for shorting each of the major indices into resistance. Since we identified the Nasdaq as the weakest of the major indices, we initially shorted QQQ on a bounce (retracement), then added SPY and DIA shorts into a slightly greater bounce. Rather than shorting the entire share size of each position all at once, we legged into each short, 1/4 position at a time, with minimal shares on each entry. (As a side note, using a brokerage firm who charges you “per share” instead of “per trade” commissions make a huge difference when doing this).
Although we had decent short entry points into the bounce, a downtrend never became established. Instead, the market entered into a choppy, sideways trading range that lasted the entire morning. Unfortunately, an intraday sideways range often occurs after a large opening gap because the market has already made such a large percentage move right on the open. The sideways trading is a correction by time that allows moving averages to rise or fall to meet the price of the market. Therefore, while large opening gaps are great if you have overnight positions on the right side of the market, they are often difficult for intraday traders because of the sideways chop that often follows.
Because new lows were never established, we eventually closed our short positions for a scratch on the first entry and small losses on the second entry. We then waited in cash for a trend or some type of clear signal to develop in the afternoon session. After going to cash, we quickly noticed that SPY and DIA were each poised to break resistance of the upper channel of the downtrend line from the prior 2 days. This indicated potential long setups and we immediately set buy stops to buy both SPY and DIA if they broke resistance of their respective downtrend lines. Coincidentally, the downtrend lines also corresponded to a break of the intraday highs. The 15-minute chart of SPY below illustrates the trendline we were watching and where we placed our buy orders (the DIA chart looks similar):
As you can see from the chart above, we bought SPY (and DIA) when the trendline resistance was broken and took profits when the rally ran into resistance of the previous day’s low, netting a decent profit. Although the market set new highs and made another leg up into the final hour of trading, we did not like the risk of being long the final hour due to the overhead resistance from the previous day. Nevertheless, volume was strong enough for the rally to be sustained and the major indices each closed at their highs of the day. The rally into the final hour surprised quite a few traders, but it was fueled by a rumor that Russia had brokered a deal with Iraq for complete disarment that would meet UN requirements. Even though it was only a rumor, it was enough to drive the market higher on speculation.
Going into today, we have a slight bullish bias based on the way the market acted yesterday afternoon. In addition, all the daily charts are now showing bullish hammer patterns. However, we need to be cautious because yesterday’s rally was largely driven by news (or rather a rumor of news). Because we remain in a news-driven market, any news to the contrary of yesterday’s rumor is just as likely to drive the market back down. The pre-market gap down (as of 6:30 am EST) in the S&P futures today is a good example of what I am referring to. From a technical basis, the rally also put both SPY and DIA just below resistance of their 20-day moving averages again. QQQ is above its 20-day MA, but SPY and DIA will have to contend with their 20-day MAs if they attempt to rally today. The major indices are likely to be choppy today, so you may wish to look at the HOLDRS and look for individual sectors showing relative strength or weakness instead. Although we have a minor bullish basis going into the day, we are keeping both eyes wide open and are ready to change our opinions at a moment’s notice if the market dictates such necessity.
Today’s watch list:
RTH – Retail HOLDRS
Long
Trigger = above 66.75 (above yesterday’s high AND the 200-MA/60 min.)
Target = 68.35 (resistance of 50-day MA)
Stop = 65.90 (below 20 and 40-MAs/60 min.)
Notes = We have been watching this sector for a long entry during the past week, but it keeps missing our trigger point. We liked the bullish action and close at yesterday’s high. A break above yesterday’s high could spark a rally up to the 50-day moving average. We have been seeing sector rotation back into this sector.
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).
Closed
Positions:
-
(none)
Open Positions:
-
(none)
Notes: Because of the large opening gap down in SMH, we sent an e-mail alert explaining that the risk/reward ratio was too negative to take the trade setup even though it hit the trigger price. This was a wise move because it never dropped more than about 20 cents below our entry before reversing to close at the highs. We made a few trades in the ETF Real-Time Room yesterday, but those will be reported in the next weekly newsletter. We were cash overnight.
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
change.
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
updates.
SOH = Sit On Hands (Don’t Make Trades)
Closed P&L
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.
Unless
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