The major indices began the day yesterday with a small opening gap down that put both SPY (S&P 500 Index) and DIA (Dow Jones Indu. Avg.) both below support of the uptrend line from the lows of March 12. Because we have been watching for a break of this steep uptrend line for the past several days, we were fully prepared to sell short immediately after realizing the trendline had been broken because it was unlikely the opening gap down would be immediately filled once the trendline was broken. As such, we netted over one point of profit through shorting both SPY and DIA and then incrementally covering the position incrementally throughout the first hour of the day. Our strategy of “scaling out” of the short position worked great and enabled us to maximize our profits on the short side of the market without significant risk of giving it all back if the market reversed, which it did shortly after we covered the last of our short positions. In order to help you understand why we shorted SPY and how we chose which prices to cover, we have labeled a detailed chart for you below. Consult the key underneath the chart for an explanation of the numbers:
- Explanation of chart
- 1 – This line marks the high of the previous day, March 19
- 2 – This is the trendline from the low of March 12, the one we have been following on the hourly chart
- 3 – This line marks the low of March 18, which was our initial price target on the SPY short
- 4 – Notice how SPY opened the day BELOW the trendline support. This was our trigger to sell short because former support becomes new resistance.
- 5 – We covered 1/4 of the short position due to support of the previous “swing low” on March 19
- 6 – We covered another 1/4 of the position due to support of the intraday low on March 19
- 7 – We covered another 1/4 of the position due to support of March 18 low, which was our initial price target
- 8 – We covered the final 1/4 of the position when SPY rallied to hit our trailing stop just over 87.00
- 9 – Notice how the high of yesterday was NOT able to break the trendline from March 12 low. Again, prior support becomes the new resistance level.
- 10 – SPY eventually closes exactly at the high of the previous day
After we closed the remaining shares of our short positions around 10:30 am, the market began to reverse its early losses as traders assessed comments from the Pentagon regarding the Iraq conflict. The market apparently liked what the U.S. had to say because the major indices then began an uptrend that lasted throughout the rest of the day. Although the market showed strength in the latter half of the day, it was not very convincing because the market kept running into resistance from the previous several days. SPY, DIA, and QQQ each rallied above their previous day’s highs around 1:30 pm EST, but the breakout was short-lived because each of the three broad-based ETFs ran into resistance from the hourly trendline (labeled as number 9 on the chart above). This caused the market to fall back into the prior trading range about an hour later. Going into the close, each of the major indices closed within pennies of the previous day’s high, indicating a tug-of-war as traders jockied between breaking out to new highs and selling due to failure to break resistance. This indecision was largely the result of decreased volume yesterday as many traders still remained on the sidelines.
Looking at the daily charts of the major indices and ignoring the intraday action, you will see that the major indices are each consolidating at the highs. This is technically a bullish formation that is starting to indicate we will see another leg higher in the intermediate term. Most likely, we will at least see a rally up to the 200-day moving averages of both SPY and DIA (QQQ already surpassed that level). However, as you know, this can all be changed if the market’s perception of the war suddenly becomes negative for any reason. Note the “bottoming tails” on the candlesticks of the past several days on the DIA chart below. These tails are bullish because they indicate that every time the market begins to sell off, buyers step in and rally the market right back up:
Although the market overall does not appear weak, we recommend caution on the long side today for several reasons. First, it is “Quadruple Witching” options expiration day. This usually causes a lot of erratic price action that causes indexes to close near their strike prices, especially in the latter half of the day. Second, both SPY and DIA are up against resistance of their 20-week moving averages, which also correlates to the trendline resistance from the highs of March 2002. Support and resistance levels on weekly charts are obviously more important than support and resistance on daily charts, so keep a close eye on those weekly charts. Finally, be alert and remember that the market will continue to be news-driven today. Use mechanical stops in all instances to protect against sharp and sudden reversals that could occur if big war news or rumors hit the street.
Today’s watch list:
BBH – Biotechnology HOLDR
Trigger = (see notes below)
Target = $102 (high of May, 2002)
Stop = (see notes below)
Notes = We finally got our pullback to $93 on BBH yesterday and it rallied a bit to close over $94. I would like to let it settle for another day or two to ensure it will hold support and we will then consider taking a position in the beginning of next week. Continue keeping an eye on it over the next several days. You will notice there is no trigger price listed; however, we will send an e-mail alert when/if we enter the position.
We are not listing any other plays for today due to Quadruple Witching options expiration and a large pre-market opening gap. We also do not plan on taking any positions over the weekend; however, we may have some short-term intraday trades in the ETF Real-Time Room today.
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 short (from March 20) –
shorted 87.45 (avg.), covered 86.87 (avg.),
points = + 0.58, net P/L = + $110
DIA short (from March 20) –
shorted 82.32 (avg.), covered 81.88 (avg.),
points = + 0.44, net P/L = + $82
Notes: In addition to the trades above, we also had a few small profitable SPY and DIA intraday trades in the ETF Real-Time Room, which 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