Friday’s action in the major indices ended the week on a mildly bullish tone, despite broad-market weakness in the beginning of the week. QQQ (Nasdaq 100 Index) closed the week with a small gain, while SPY (S&P 500 Index) and DIA (Dow Jones Indu. Avg.) both lagged the Nasdaq and closed slightly slower last week. In particular, SMH (Semiconductor HOLDRS) has been quite strong and broke out of a consolidation level on Friday. Look for SMH to lead the market in the coming week as well. On the downside, DIA has been the weakest of the three major indices and has barely been able to muster up a modest bounce each day there has been strength in QQQ and SPY. If the market shows weakness in the coming week, it will likely be led by DIA and the Dow.
Although intraday trends have been short-lived, requiring us to take profits on our intraday trades much quicker than we usually would, the longer term daily and weekly charts of the major indices are starting to look pretty interesting. Because volatility has dried up considerably during the past week, the volatility contraction is positioning the market to make a big move one way or the other very soon. In particular, take a look at the daily chart of QQQ below:
QQQ is consolidating at some closely watched moving average levels, especially the 50 and 200-day moving averages. If QQQ breaks above these levels, we are likely to see a sharp increase in volume as players rush to buy the technical breakout through resistance. If QQQ breaks the highs of the past two weeks, which is around 25.40, it will probably see a quick run up to its 0.618 Fibo retracment from the January high to the February low. Although I have not drawn it on the chart above, there is actually mulitple Fibo convergence levels because the 0.382 Fibo retracement from the DECEMBER high to the February low ALSO corresponds with the 0.618 level illustrated above. Convergence is powerful and it increases the odds of a sharp rally once that level is broken. So, we are prepared to buy QQQ on a break above the 2-week high, which would also represent a break of the 50 and 200-day moving averages, as well as the multiple Fibo convergence. The next resistance point would be the upper channel resistance of the downtrend line from the December highs (illustrated above).
In addition to the daily charts, it is even more important to keep an eye on the weekly charts. Although we don’t typically base intraday entry and exit points on weekly charts, it is important to know where the key resistance and support levels are on the weekly charts because they will be even more powerful than support/resistance levels on the daily charts. With QQQ, it is within a few cents of trading back ABOVE its 20-week moving average AND is approaching the upper channel of the downtrend from the high of May 2002. Notice how this downtrend line also corresponds with the 50-week moving average:
SPY has been doing okay, but is still lagging QQQ. DIA, as mentioned earlier, has been the weakest of the three major indices, so it is important to keep a close eye on the performance of the Dow. Without strength in the Dow, any breakout in the Nasdaq is likely to be short-lived. The bottom line is that the best looking long setups in the market coming into the week are QQQ and SMH, while the best short setup IF the market shows weakness is likely to be DIA.
On a final note, have you noticed how the market has actually been showing some bullish resilience, even in the face of negative geopolitical news and fears? This is telling us that the market is showing relative strength to negative news and therefore the slightest bit of positive news is likely to pop the market higher. It’s important that you notice this shift in sentiment over what we were seeing a month ago.
Today’s watch list:
QQQ – Nasdaq 100 Index Tracking Stock
Trigger = HALF above 25.30, HALF above 25.40 (above Friday’s high and MA resistance, add above 2-week highs)
Target = 25.84 (0.618 Fibo resistance from Jan. high to Feb. low; also upper channel of downtrend from Dec. high)
Stop = 25.10 (below Friday’s close)
Notes = Playing a breakout of the volatility contraction at daily moving average resistance. See today’s commentary for more detail.
SMH – Semiconductor HOLDRS
Trigger = above 23.65 (above Friday’s high and 2-week highs)
Target = 24.45 (0.382 Fibo resistance from Dec. high to Feb. low)
Stop = 23.25 (below Friday’s breakout level)
Notes = This is a breakout play, as you can see on the daily chart above
DIA – DIAMONDS (Dow Jones Industrial Average Index Tracking Stock)
Trigger = below 78.60 (below lower channel support of last week’s uptrend and Friday’s low)
Target = 77.25 (low of February 25)
Stop = 79.20 (back above uptrend line, which would indicate a failed breakdown)
Notes = Although this short is not likely to trigger, it is good to be prepared on both sides of the market and the Dow has been the weakest of the three major indices.
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).
SPY long (from Feb. 28) –
Bought 84.75 (avg.), sold 84.94 (avg.), points = + 0.19, net P/L = + $32
RTH long (from Feb. 26) –
Bought 66.80, sold 66.35 (avg.), points = (0.45), net P/L = ($48)
Notes: We were cash over the weekend.
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