As you might expect to see after such a steep drop on Monday, the major indices rebounded yesterday and actually did so through a steady intraday uptrend in the morning that provided us with a profitable intraday trade opportunity in QQQ. In addition, yesterday’s price stabilization after Monday’s retracement provided us with low-risk entry points on a few long swing trades we have had our eyes on during the past week (BBH and QQQ). After forming an intraday double top around 2:30 pm EST, the major indices gave back some of their morning gains and became rather choppy during the final 90 minutes of trading. This was expected because of traders’ indecision about whether to be long or short going overnight, given the uncertainty of allied troops approaching Baghdad. Because we anticipated this volatility into the close, we closed our intraday trades by mid-afternoon and instead focused only on managing our swing trades.
One thing we were happy to see is that yesterday’s total market volume in both the NYSE and Nasdaq was higher than Monday’s volume. This indicates there were more buyers during yesterday’s recovery than there were sellers during Monday’s selloff. If yesterday’s volume would have been lighter than Monday’s, it would have potentially indicated that more sellers are starting to creep back into the market than buyers. But, that does not appear to be the case as of now. As I am always hammering into your brain, volume does not lie and is the most accurate leading indicator at your disposal!
The sector rotation we were anticipating out of the Dow and S&P and back into the Nasdaq occurred yesterday as QQQ (Nasdaq-100 Index) showed the most relative strength, while DIA (Dow Jones Indu. Avg.) showed the most relative weakness. As you may recall, this is the complete opposite scenario of what we were seeing last week. This can easily be explained by the fact that institutions are continually shifting their money around from sector to sector based on where they feel the most opportunity is. Because the Nasdaq was showing so much relative strength two weeks ago, when the rally first began, it corrected by time last week and just traded sideways while money instead flowed into SPY (S&P 500 Index) and DIA. Now that QQQ has corrected, money is beginning to flow out of SPY and DIA and back into QQQ, which is why we bought QQQ instead of SPY or DIA yesterday. Your goal as an ETF trader is to continually be “in the flow” with the shifts in sector rotation and institutional money flow so that you are always in the right sectors. Through buying sectors or indexes with relative strength and shorting those with relative weakness, you increase your potential profits and decrease your risk of loss.
How do you determine which of the broad-based indices are showing the most relative strength? One way to do it is through looking at a quote list and determining which indexes are moving up at a proportionately higher percentage throughout the day. If, for example, SPY rallies 0.43% during a one-hour time period, but DIA rallies 0.89% during that same period, it could probably be said that DIA has “relative strength” to SPY and is a better long candidate of the two. Conversely, indexes that drop at a higher percentage could be said to have “relative weakness” and are your best short candidates. An easier way to determine which sectors or indexes have relative strength or weakness is to look at charts and compare key pivot points of support and resistance such as the previous day’s close, high, and low. For example, take a look at a chart that shows yesterday’s performance in DIA:
Notice how DIA failed to break the previous day’s high yesterday. Also notice that DIA briefly probed below Monday’s low during the weakness in the morning. In contrast, take a look at the same chart of QQQ, which showed relative strength to DIA yesterday:
Unlike DIA, QQQ actually broke above its previous day’s high, although it did not close above it. Also notice that QQQ did NOT break below the previous day’s low when DIA did in the morning. Again, these subtle details indicate that QQQ had relative strength. Another way you can look for relative strength or weakness is to overlay two different indices or sectors on one chart and the difference will often become more obvious than when using two different charts. Although it may initially seem difficult to spot these nuances between major indices and sectors, it becomes much easier once you train your eyes to do so. With time, you will be able to quickly glance at any two charts and, within a matter of seconds, determine which of the two charts is showing the most relative strength or weakness. This is what we teach you and all our subscribers to do every day in the ETF Real-Time Room.
Going into today, keep an eye on yesterday’s lows in the major indices. Since we broke the March 12 uptrend line two days ago, yesterday’s lows now become the new anchor point of a more gradual, less steep trendline from the March 12 lows. Take a look at the new trendline that is being formed on SPY (most other indices look similar):
If we break yesterday’s lows, the market will once again need to search for a new low to form a new anchor point of the uptrend. However, assuming the prior lows are not broken, this new trendline should serve to gradually push the market higher today, although we would not expect the trend to necessarily be smooth due to the overhead resistance from the end of last week, as well as some intraday moving averages on the hourly charts. Above all, remember that we remain in a news-driven environment where various war rumors and news is subject to wrecking even the best technical setup. Based on yesterday’s final 90 minutes of trading and today’s pre-market futures action, it looks like it may be choppy out there today. Make sure you control risk by trading with reduced share size and using firm mechanical stops.
Today’s watch list:
DIA – DIAMONDS (Dow Jones Industrial Average Tracking Stock)
Trigger = below $82.25 (below trendline support and 200-MA/15 min.)
Target = $81.10 (0.382 Fibo support level from the March 12 low to March 21 high)
Stop = $82.85 (above yesterday’s close and the trendline)
Notes = Since the Dow was the weakest of the three broad-based indices yesterday, we will be looking to short DIA on a break of its trendline support today. The expected duration of this trade is 1 – 2 days if it triggers.
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).
BBH long (from March 25) –
bought 93.05, stop at 89.20, target of 101.20, open points = + 1.15, open P/L = + $113
QQQ long (HALF position from March 25) –
bought 26.14, stop at 25.10, target of 28.75, open points = + 0.27, open P/L = + $51
Notes: Both BBH and QQQ are intended to be “multi-week” trades with loose stops and significant profit targets. We will trail the stops higher as the trades become more in the money. Note that we only have a 1/2 position of QQQ so far. As mentioned in the e-mail yesterday, it’s a good idea to hedge these trades with options based on the uncertainties of the war situation.
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