As you probably read all over the media over the weekend, last week’s continuation of the rally that began on the afternoon of March 12 was quite impressive and caused some events to happen that we have not seen in years. Friday was the eighth consecutive day of gains in SPY and the S&P 500 Index, which doubled the previous record of four consecutive days of gains since the bear market began in September 2000. In addition, the Dow Jones Industrial Average had its biggest one-week percentage gain since 1982! Most importantly, strong volume last week confirmed the rally was for real, as we initially pointed out when we saw the first volume spike on March 12.
Many traders (myself included) expected to see at least a minor retracement on Friday due to the expectation that many traders would want to be cash over the weekend because a lot can happen in a war during a three-day period. However, because of how well the war seemed to be going during its first three days, it seems that many traders instead preferred to place a bet that the war would virtually be over by Monday and perhaps we would even capture or kill Hussein by then. Although perhaps a bit naive to think this would occur, it would have undoubtedly caused a sharp, albeit short-lived, rally going into today. But, we also knew that any negative change in the public’s perception of the war over the weekend could easily cause the market to give back a large portion of its gains. As such, we chose to remain in cash over the weekend because being both long and short were risky, although the risk/reward ratio favored the short side.
Based on events that occurred over the weekend, I am getting a sense that many people are beginning to think the war will take more time and lives than initially expected. Because much of last week’s rally was already pricing in the expectation of a swift war with minimal loss of lives, any perception other than that is likely to be a drag on the markets going into this week. Combined with the fact that the market was already technically overbought going into today, we expect to see some moderate to heavy selling over the next day or two. However, it is difficult to know what to expect beyond more than a day or two because much of the market’s action will continue to be news-driven by the chain of events that occur with regard to the war. While most charts, especially the weekly charts, are pointing to further upside prices in the intermediate term, this will largely be determined by both the duration and outcome of the war. That being said, let’s look at a few interesting technicals that occurred with last week’s rally.
The most interesting thing about Friday was that SPY and the S&P futures both closed EXACTLY at their 200-day moving averages! Friday’s closing price in SPY was 89.67, which is EXACTLY equal to its 200-day moving average. We often talk about the power of the 200-MA to cause resistance or support on various time frames and this was a clear example. The daily chart of SPY below illustrates this:
Unlike SPY, DIA (and the Dow) broke through its 200-day moving average on Friday and closed slightly above it. Keep a close eye on that 200-day moving average for both DIA and SPY because both indices need to break and stay above their 200-day MAs in order to see any more upside price action. QQQ, which has been showing relative strength to SPY and DIA, has been well above its 200-day MA for several weeks. QQQ also closed within pennies of breaking its high of the year, 27.47, that was set on January 13. While scanning the technology sectors, we also noticed that SMH (Semiconductor HOLDRS) also closed within pennies of its January high. Take a look:
If SMH fails to go any higher, Friday’s close will be a perfect double top for the year, although we are not necessarily expecting to see much of a retracement; consolidation near the highs seems more likely. The Semiconductor sector usually leads the broad market, so keep an eye on SMH over the next several days for clues regarding overall market direction.
We will most likely see a price retracement in the broad market and then a period of consolidation before the markets again attempt to breakout. Although it’s possible we could keep going higher without a correction, the risk/reward ratio of getting long here is not a good one. This is certainly not the time to chase long entries, even if you missed all or part of last week’s rally. However, be equally careful on the short side because any rumor or news of something positive on the war front could reverse any weakness in the blink of an eye. The best strategy is to focus on trading the market one day at a time and not worrying about what the market will do next week or next month because too many unpredictable events can happen in the war between now and then. Most importantly, we recommend you take it easy with overnight positions until we see a solid support base begin to build in the markets and more time has passed with the war. While our most profitable trades are often the result of overnight low-risk overnight positions, remember that “missed money is better than lost money” and there is no better time I can think of than right now when that paradox rings true.
It looks like the market will open with a significant opening gap down, which began when the futures opened for trading on Sunday evening. If the futures do not recover into the open, we will open near Friday’s low in the S&P and Dow, which will trap a lot of bulls who were long over the weekend. While there is a good possibility this will trigger an intraday downtrend, remember that the market has been pretty resilient during the past week and many traders have been buying on weakness rather than selling into strength. Therefore, we want to see confirmation that the market is not likely to recover before selling short. Consider using the MTG Opening Gap Rules, which basically state that we want to see a break of the 20-minute opening low before getting short. This prevents shorting the opening gap down only to watch it sharply rally into the first reversal period. Either way, it could get pretty volatile out there as bets are placed on both sides of the market, so use caution and keep your share size small.
Today’s watch list:
DIA – DIAMONDS (Dow Jones Industrial Average Tracking Stock)
Trigger = $83.40 (below trendline support from low of March 12; also the 20-MA/60 min.)
Target = $81.55 (support of March 20 low, just above the 0.382 Fibo retracement)
Stop = $84.30 (back above the trendline resistance)
Notes = There is a strong pre-market gap down, so remember that we will only short DIA if it sets a new low after the first twenty minutes of trading. Shorting into the sharp gap down without waiting for confirmation first is too risky. Use the MTG Opening Gap Rules as a guide.
SPY – SPYDERS (S&P 500 Index Tracking Stock)
Trigger = $88.10 (below trendline support from low of March 12; also the 20-MA/60 min.)
Target = $86.55 (support of March 20 low, just above the 0.382 Fibo retracement)
Stop = $88.90 (back above the trendline resistance)
Notes = Same setup as DIA above. There is a strong pre-market gap down, so remember that we will only short SPY if it sets a new low after the first twenty minutes of trading. Shorting into the sharp gap down without waiting for confirmation first is too risky. Use the MTG Opening Gap Rules as a guide.
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: No trades from The Wagner Daily on Friday
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