On an intraday basis, yesterday was extremely uneventful as the major indices spent a vast majority of the day in a narrow, sideways range. Just like the previous day (Monday), the only clear technical setup, which was a break of the lows, came within the final thirty minutes of trading. Although the Nasdaq technically would have been expected to sell off yesterday morning on the heels of the weak close of March 10, QQQ actually rallied sharply in the morning session, failed to breakout, broke to new lows but failed to breakdown, then settled into a narrow trading range for the remainder of the day until the final thirty minutes. Although we entered an intraday short in SPY once it broke to new lows of the year at 81.00, we closed the position shortly thereafter because the breakdown failed as SPY attempted to reverse the morning downtrend. Because the major indices spent the next several hours in the middle of their respective intraday trading ranges, we remained in cash because the market can easily go either direction when it is in the middle of its range, which is also known as “the danger zone.” Overall, yesterday did not provide intraday traders with many opportunities unless you were scalping for 10-cent profits.
You may noticed that SPY broke the February 13 low yesterday, causing a new low of the year to be formed. DIA, which had already broken the February 13 low, again set a new low. QQQ, however, continues to be showing relative strength and barely closed lower on the day. This is because strength in the Internets and Semiconductors have been holding the Nasdaq up. Based on yesterday’s new lows of the year, SPY and DIA are now both closing in on the prior October lows. In fact, both of those indexes closed within the intraday range, near the highs, of October 10 (which saw the lowest intraday prices of last year). It is now becoming pretty clear that SPY and DIA (maybe QQQ) will test the October lows. However, we don’t expect that to happen in a smooth fashion by any means. In fact, the Dow is now approaching support of the lower channel of its downtrend from the December 2002 lows. This may lend temporary price support to DIA, although the price could easily extend beyond the lows of the channel. Take a look at the daily chart below:
It’s interesting to note is the lack of follow-through in the direction of the trend going into the next day. Typically, if the market closes at the highs of the day on decent volume, the market will gap up the next morning a majority of the time. The inverse is true in that the market will usually gap down and sell off if it closes near the lows of the day. This follow-through is the basis on which we often base many of our overnight “swing” trades. However, you may have noticed that we have been seeing quite the opposite effect recently. In particular, the closing price at the high on Friday, March 7, after consolidating at the highs for several days, will usually lead to an opening gap ABOVE resistance the next morning. Instead, the market gapped down to the middle of the previous day’s trading range, then proceeded to sell off the entire day and close BELOW the low of March 7. Based on this weak close of March 10, we would expect follow-through to the downside going into the next day. Instead, the market gapped up slightly, then rallied up to the middle of the previous day’s range. By the end of the day, the market was back to the lows. These steep retracements and opposite morning gaps are the reason we have not been engaging in many overnight trades lately. Although the market is slowly drifting to new lows on the daily chart, the intraday action is so erratic that any overnight trades are likely to be stopped out, even though the trade would have eventually worked in your favor. Chris Chang, Associate Editor at MTG, studied the daily charts of the Nasdaq and came to the following conclusions:
In a perfectly “choppy” world of alternating up and down days, we should expect nearly a one to one ratio
of choppy and consecutive days. Based on our analysis of the Nasdaq Composite, for example, we would expect 48 choppy days and 47 continuation days out of the past 95 days, giving us a ratio of 50.5%. However, there have actually been twice as many choppy days as trending (continuation) days, giving us a 2/3 (67%) probability that the next day can be expected to be a choppy day and
a 1/3 (33%) probability that the next day will be a continuation day. What is the bottom line? The market continues to be in “chop chop” mode that will eat your lunch if you overtrade. Just remember that we cannot force the trades to happen; rather, we simply need to take what the market gives us. If it is not giving us much, then we need to continue to be patient, sitting on the sidelines. By doing so, we will be strong, nimble, and ready to go when the setups return. Continue being patient and you will eventually be rewarded.
Today’s watch list:
We had a few decent short setups going into today, but the large opening gap down in the S&P futures may throw off our entry prices. In addition, rumors are again circulating about the capture of Bin Laden and the rumors have really caused some erratic action in the pre-market futures today. As such, we are not listing any specific trade setups today because we want to let the market settle first. However, we will email you if we detect and enter any low-risk trade setups.
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 SMH and QQQ briefly triggered in the morning, we made the decision not to enter the positions (via our e-mail alert) based on the light volume and relative strength of the Nasdaq in the morning. This turned out to be a wise decision because we would have been stopped out on the morning rally.
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