Friday was another wild, news-driven day that once again caused the major indices such as SPY, DIA, and QQQ to trade in a volatile and erratic manner throughout the day. After opening with a large gap down that broke three weeks of price support, news was released less than an hour later that stated Osama Bin Laden’s two oldest sons were captured. Although the report was not initially confirmed by the U.S., it didn’t matter because it provided an impetus to quickly and sharply rally the market to reverse the losses from the opening gap down. Then, when Hans Blix began his presentation to the U.N. Security Council, the rally quickly faded, setting in motion a volatile, sideways chop that lasted through the rest of the day. Although news was the primary driving force behind the market’s action on Friday, technical analysis still played a major role in acting as support and resistance. The 15-minute chart of SPY below illustrates this:
Notice how even though the recovery off the opening gap down was very rapid and fueled by relatively high volume, SPY ran into a brick wall and was unable to go any higher once it rallied up to the high of the previous day. Then, on its first retracement, SPY found support at the low of the week (March 5). SPY then oscillated between its morning high and support from the March 5 low throughout the rest of the day.
Because of the MTG Opening Gap Rules, we avoided losses on Friday by not shorting the opening gap down. The break of the 20-minute opening lows never came, so we did not short the broad-based indices. We did, however, short a half position of SMH in the ETF Real-Time Room, but only lost 10 cents on the trade because we covered on the first retracement after the sharp spike. Further, because the Semis were showing the most relative weakness among the various sector ETFs, our risk of shorting SMH was much less than shorting the broad-based indices such as SPY, DIA, and QQQ. Interestingly, we shorted SMH later that afternoon and made 10 cents of profit on a half position of SMH, so we basically scratched. Although we were looking for key breakout or breakdown points to short the broad-based indices on Friday, our trigger points never came because the major indices just traded in a sideways, although volatile, range for the remainder of the day.
Going into today, keep an eye on the 83.50 – 83.60 area of SPY, which has served as key resistance for the past four days. Notice (on the chart above) how SPY has attempted to break the 83.50 – 83.60 area six times within the past four days! That’s a perfect example of the basic technical analysis term known as “resistance.” Obviously, a break above the 83.60 area, which also has resistance of the 200-MA/15 min. chart, would be a clear buy setup for SPY. Be aware of the 20-day moving average just overhead at 83.85. SPY has been playing with the 20-day moving average, both above and below it, and is likely to run into resistance if it once again tests that level. However, if volume is strong enough to break above the 20-day moving average, SPY could potentially rally up to its “swing high” of March 3, which is 85.78. Therefore, we are listing SPY as one of our trade setups for today.
QQQ followed a similar pattern to SPY on Friday, but showed a little more relative weakness into the close on Friday because it did not close at its highs like SPY. But, just like SPY, QQQ has resistance of both its 20-day moving average and its 200-MA/15 min. overhead. It’s important to note that total market volume in the Nasdaq was the highest we have seen since January 31, clocking in at 1.42 billion shares. Watch the volume closely for any signs of follow-through today. If volume stays decent, QQQ will have a good shot at a steady trend today.
DIA continues to show the most relative weakness of the three major indices. The most noticeable divergence with DIA was the opening gap down in which DIA actually opened BELOW its February 13 low, temporarily setting a new low for the year. Because the broad market reversed its morning losses, DIA rallied back to close above the February 13 intraday low. However, relative weakness and divergence was still evident because, unlike SPY and QQQ, DIA was not able to rally all the way up to test the highs of March 5 and 6. Therefore, we will once again look for shorting opportunities IF the broad market is weak today. We would also want to see DIA trade below support at 76.50 area before shorting it.
Today’s watch list:
SPY – SPYDERS (S&P 500 Index Tracking Stock)
Trigger = HALF above 83.63, HALF above 83.90 (HALF above last week’s high, HALF above 20-day moving average)
Target = 85.70 (“swing high” of March 3)
Stop = 83.20 (below Friday’s close)
Notes = Setup discussed in commentary above. We will only buy a half position on break of last week’s highs, but will add to it IF and ONLY IF it breaks its 20-day moving average. We like the risk/reward ratio in this setup.
UTH – Utilities HOLDR
Trigger = above 60.25 (breakout on daily chart; watch XUH for trigger instead of UTH)
Target = 62.05 (0.50 Fibo retracement from Jan. high to Feb. low; correlates with 50-day MA)
Stop = 59.50 (below 20-MA/60 min. chart)
Notes = We are still watching this setup for a potential long entry because it did not hit its trigger price on Friday. Because of the wide spread of UTH, always follow the Utilities HOLDR Index (XUH) when looking for an entry price because it more accurately shows you the fair value of UTH. Therefore, we will only buy UTH if the Utilities HOLDR Index (XUH) trades through the trigger price of 60.35. For those of you who do not have access to direct access software that can provide you with quotes on indexes, consider waiting for the BID price of UTH to rise up to the trigger price to ensure the trade actually triggered. You may also consider trading XLU instead of UTH because it is a lower-priced and more liquid ETF with similar components to UTH.
** In addition to the two setups above, we want to give you a heads-up on BBH (Biotechnology HOLDR) for a potential long entry above 90. Daily chart is showing key resistance level at 90, but we don’t want to list BBH as an official setup for today because its movement is heavily based on AMGN, which is getting a bit overextended here. We will send you an e-mail alert if we decide to enter it.
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 (2/3 position size from March 6) –
Bought 57.04, sold 57.79 (avg.), points = + 0.75, net P/L = + $47
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