Volume! Just as I was beginning to forget what it is like to have strong volume and a sustainable move, we finally saw some volume return to the market yesterday and the direct correlation between increased volume and sustained price action was readily apparent. Although yesterday morning started out with the same slow bleed and indifferent trading action we have become accustomed to for the past several days, buyers stepped in during the early afternoon session and sparked a rally. That rally caused an increase in volume as shorts were forced to cover their positions and program buying kicked in. The volume then fed on itself, fueling the rally to higher highs throughout the entire session to close on the highs of the day.
We have been closely watching total market volume and have been discussing it nearly every day because we have not been interested in taking positions until we saw an increase in volume, which is usually necessary in order for a move to follow-through and be sustainable. Think of increasing market volume as adding fuel to a fire. Without fuel, any fire that was started will burn out shortly thereafter. However, as long as fuel is present, the fire will continue burning. Want the fire to burn bigger and hotter? Add more fuel. Total market volume works very much the same way. If a rally is sparked but the volume remains light and does not increase proportionately, the rally will quickly fade and “burn out.” However, as long as volume is increasing, it is likely to continue fueling the rally. The more volume increases, the longer the rally is likely to be sustained. Why do I mention all this? Because yesterday afternoon’s rally was one of the first broad market rallies in a long time that did not fizzle out shortly after it began and there was a very clear correlation between the increase in volume and the strength of the rally. To illustrate this, first take a look at daily charts of both the NYSE and Nasdaq Total Market Volume:
Next, look at an intraday chart of SPY, which illustrates the momentum of the rally (notice how wide the intraday range of the rally is):
In addition to the volume, the rally was aided by DIA (and the Dow) coming down to support of the lower channel of the downtrend line from the lows of December. We gave you a heads-up yesterday morning that the Dow was approaching this trendline and was likely to bounce off it, which is exactly what happened in the afternoon. Check out yesterday’s Wagner Daily and you will see the trendline I am referencing.
Going into today, the daily charts of nearly every index and sector are showing bullish “hammer” candlestick formations which occur when we see a selloff in the morning and then a strong reversal and rally that closes at the highs of the day, above the prior highs of the morning session. Typically, the “hammer” candlestick pattern points to a short term reversal of a downtrend. Because strong volume confirmed the reversal yesterday afternoon, we would expect to see some follow-through on the heels of the reversal day today. However, because the rally was so strong, combined with today’s opening gap, we would not be surprised to see some type of correction, either by price (a pullback) or time (sideways trading action). The main level to keep an eye on for resistance is the upper channel of the downtrend line from the high of March 3. Most of the indices are approaching that level and today’s opening gap (assuming it holds) will put many of the broad-based indices right at this key resistance level. This trendline can be seen on an hourly chart. I have illustrated this trendline on a chart of SPY below. Most of the major indices have similar trendline in place:
Last, remember to use the MTG Opening Gap Rules before buying any long positions. The rules basically say to wait until we enter the first reversal period going into 10 am EST to ensure the gap is going to hold before going long. The gap rules keep you out of trouble by preventing you from buying at the high of the day before a gap fades. If the gap holds into 10 am, chances are good that we go higher today. Finally, those of you who have a free trial to our ETF Real-Time Room but have not tried it out yet are invited to stop by. You received login instructions when you signed for your trial, but email us if you need that information resent to you.
Today’s watch list:
IWM – Russell 2000 Index iShares
Trigger = above 69.30 (above trendline resistance from March 3 high)
Target = 70.15 (0.382 Fibo retracement AND 200-MA/15 min.)
Stop = 68.90 (below yesterday’s close)
Notes = Remember to use the MTG Opening Gap Rules before buying any opening gap up. The gap may render this play difficult to enter due to risk/reward.
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 (HALF position from March 12) –
Bought 80.63, new stop at 80.90,
open points = + 0.43, open P/L = + $41
Notes: In addition a few intraday trades made in the ETF Real-Time Room yesterday, we took a HALF position of SPY long overnight per our e-mail alert before the close. SPY is gapping up nicely in the pre-market, so we will e-mail an alert after the open if we take profits into the opening gap.
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