Although the daily charts of the major indices are technically still in a trading range for the past two weeks, it is beginning to look like a big break (in either direction) is going to occur soon based on the volatility contraction and wedge formation on the daily charts. In addition, the NYSE TRIN closed at 3.70 yesterday! That is an extreme reading that indicates heavy selling pressure, but total market volume was too light to confirm.
Yesterday was a technically significant day because the selling in the broad market definitively caused the major indices to break below the lower channel support of the uptrend from the lows of February 13. The hourly chart of SPY below illustrates this key break of support. Note the long red candle and increase in volume when this trendline was broken. This illustrates that many other technical traders were watching that same key level:
Although not illustrated, both DIA and QQQ also broke the same trendline yesterday. As you may already know, former support levels become the new resistance levels once the support is broken. Therefore, that same trendline that was broken yesterday will likely act as the new resistance level that is likely to stop any rally attempts in the broad market today.
The key support level to watch going into today is the lows of February 25, which also comprises the most recent anchor point of the uptrend from Feb. 13. SPY, DIA, and QQQ each closed near the Feb. 25 lows yesterday and may test that level as support today. DIA actually traded all the way down to the Feb. 25 lows, nearly to the penny, while SPY and QQQ did not quite test that level yet. The daily chart below illustrates yesterday’s test of the Feb. 25 low in DIA:
Because of the strength of the selling over the past two days, I would not be surprised to see a bounce in the broad market today. If we see further selling in the morning, the odds of a rally in the afternoon will be even higher. It is likely that the Feb. 25 lows will act as support to provide a bounce in the major indices. However, I do not have high expectations for how much the market actually rallies off of that level. On the other hand, if the Feb. 25 lows fail to provide support to the broad market, the next stop would likely be a retest of the Feb. 13 lows, which are also the lows of the year.
Finally, if we do see further weakness today, watch for relative weakness in the Nasdaq. Though the Nasdaq has been showing relative strength to the broad market lately, we feel sector rotation out of the techs and into more defensive sectors is likely. This is further compounded by the fact that QQQ closed right on its 20-day MA yesterday. While both SPY and DIA are now clearly below their 20-day moving averages, QQQ has not yet caught up. However, we feel that will happen within the next few days, assuming the broad market does not suddenly reverse back up.
Today’s watch list:
QQQ – Nasdaq 100 Index Tracking Stock
Trigger = below 24.39 (below yesterday’s low and the 20-day MA)
Target = 23.98 (just below whole number support and Feb. 25 low)
Stop = 24.60 (below the 200-day MA)
Notes = Although QQQ has been showing relative strength to the broad market over the past several sessions, it is beginning to look technically bearish, especially if it breaks below its 20-day MA at 24.50. Lower channel support of uptrend from low of Feb. 13 was broken yesterday, so that should now serve as resistance. Daily volatility contraction in Nasdaq is likely to lead to significant move one way or the other. Watch for slight relative strength in SPY/DIA to confirm sector rotation out of QQQ.
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).
OIH long (from March 4) –
Bought 57.79, stop at 56.10, target at 59.98, open points = (0.94), open P/L = ($96)
Notes: We are long OIH from overnight and have lowered our initial stop slightly due to daily moving average support/convergence at the 56.50 area. In the event OIH gaps down on the open, remember to apply the MTG Opening Gap Rules. We also had a few profitable trades in the ETF Real-Time Room yesterday that will be reported in the next weekly newsletter.
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