Commentary:
Despite an opening gap down below the prior day’s lows, the market demonstrated resiliency yesterday and eventually filled the gap before running into resistance and closing in the middle of its intraday range. Although the morning session traded in a very narrow range, buyers eventually stepped in during the mid-day doldrums and rallied the market to fill the gap before traders once again got nervous and sold the market into the close.
The most significant thing about yesterday is the fact that the market recovered off the opening lows. You may have already noticed that yesterday’s opening gap down in the SPY and DIA put both indices at their 0.382 Fibonacci retracement levels from the March 12 lows to the March 21 highs. In order for an uptrend to be sustained, you typically want to see retracements of no more than 38.2% of the range of the rally, so it was bullish that buyers stepped in when the market hit this level. In addition, the 20 and 50-day moving averages were just below yesterday’s lows, which would have also helped to provide support if the first Fibonacci level did not hold. That is why we made the decision not to short the gap down and waited it out instead. The hourly chart of DIA below illustrates how the Dow bounced off the 0.382 Fibonacci support level (click here for a primer on Fibonacci):
As you can see from the chart above, the first Fibonacci retracement level perfectly acted as support for DIA and the same thing happened with SPY yesterday. QQQ, which has been showing relative strength overall, did not trade all the way down to its first Fibonacci support level yet. Notice also how the 20-MA on the hourly chart above stopped the rally and acted as resistance. If you look at a 15-minute chart of DIA and SPY, you will notice there was also convergence of the 200-MA on that timeframe which typically acts as very powerful support or resistance. That is why we took profits quickly on the SPY position we bought yesterday afternoon in the ETF Real-Time Room.
Total market volume in the NYSE yesterday was the lightest we have seen since March 10, before the rally began. The Nasdaq volume was a bit heavier, but in line with the rest of this week. You should not be surprised to see light volume because most of the “smart money” is still on the sidelines waiting to see how things will play out when troops eventually arrive in Baghdad. From some of the news I’ve been reading, it seems like we could see an offensive campaign begin in Baghdad as early as today or this weekend. The number of surprises or lack thereof is likely to be the biggest factor that determines short-term market direction.
While the daily charts continue to look bullish, you know that intraday trading this week has been choppy and susceptible to any war rumors or pieces of news. Therefore, on an intraday trading basis, we continue to remain primarily in SOH (sit on hands) mode unless we see the occasional low-risk setup. On a technical level, it’s important that yesterday’s lows are not violated today or else it could spark a wave of selling if the major indices break below their first Fibo retracement levels. Eventually traders will forget about the war and the market will go about its usual business of following technical analysis, but the news-driven market is likely to continue at least in the short-term. As long as you are aware of that, you can simply adapt your style to be more conservative.
Today’s watch list:
DIA – DIAMONDS (Dow Jones Industrial Average Tracking Stock)
Short
Trigger = $81.45 (below yesterday’s open and price support from prior week)
Target = $80.10 (Just above 50% Fibo retracement)
Stop = $82.10 (above yesterday’s close)
Notes = DIA has been acting weak the past several days and, with today’s pre-market opening gap down, is in danger of rolling over and breaking yesterday’s lows. We will short it below the shelf of support at 81.50 area, but make sure you use the MTG Opening Gap Rules in the event that DIA gaps down and opens below its trigger price. This means we would wait for a break of the 20-minute lows if it triggers due to an opening gap down.
Although we already have a profitable open position in BBH from our entry on March 25, BBH may be a potential intraday trade today as well. After testing the key resistance level of $95.50 four times during the past two weeks and retracing to support, it appears likely that BBH will break out soon, possibly today. IF the break of the 95.50 area occurs, BBH is a buy setup for a day trade as well as the swing trade we are carrying. Since we already have an open position in BBH and to avoid confusion, we are NOT listing it as a separate play in today’s newsletter, but we will probably trade this in the ETF Real-Time Room if it breaks out. Just wanted to alert you to this in case you are interested in daytrading BBH as well.
Continue to keep an eye on EWJ, the ETF for Japan stocks, for a potential multi-week trade entry. The Nikkei has been showing signs of bottoming and EWJ is beginning to show relative strength. Primarily, we are looking for a break over $6.90, which is the weekly trendline resistance and the 20-week MA. This may or may not happen anytime soon, but just wanted to give you a heads-up. We will send an e-mail alert if/when we buy EWJ.
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).
Closed
Positions:
-
(none)
Open Positions:
-
BBH long (from March 25) –
bought 93.05, stop at 89.20, target of 101.20, open points = + 1.94, open P/L = + $192
QQQ long (HALF position from March 25) –
bought 26.14, stop at 25.10, target of 28.75, open points = + 0.23, open P/L = + $43
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. It’s a good idea to hedge these trades with options (either long puts or short calls) 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
change.
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
updates.
SOH = Sit On Hands (Don’t Make Trades)
Closed P&L
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.
Unless
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