Friday’s trading action wrapped up a rather uneventful week that was filled with narrow intraday ranges and a lot of choppiness. After the opening gap down of last Monday (March 24), the market essentially traded in a narrow range for the entire week, making it to difficult to find good risk/reward intraday trading opportunities. Last week’s total market volume was about 32% less than the previous week and that caused many false breakouts and breakdowns on an intraday basis. However, a decline in volume is what you would expect to see when the market retraces from a sharp rally. Although it may seem like the major indices gave back a lot of their previous gains last week, the reality is that each of the major indices have retraced only 1/3 from their lows of March 12 to the highs of March 21. For example, SPY (S&P 500 Index) dropped approximately 5% last week, but that is only a 1/3 retracement from the 15% rally that occurred during the two prior weeks.
As we have mentioned in the past, Fibonacci is one of the best technical indicators you can use to determine the likelihood of a whether or not a rally will continue or fizzle out (click here to read about Fibonacci). The major Fibonacci retracement levels are 38.2%, 50%, and 61.8%. Interestingly, the lows of last week in each of the major indices (SPY, QQQ, and DIA) was almost exactly equal to the first Fibo retracement level of 38.2%. The daily charts below illustrate this:
Based on today’s pre-market gap down in the futures, it looks like the market will break below the first 38.2% retracement level and is likely to open around the 50% level. The 50% Fibo level is much more important than the 38.2% level because if the rally retraces BEYOND 50% to the 61.8% level, the odds of the market stabilizing and heading back up to the highs is greatly decreased. However, if the 50% level holds as the lows this week, that could just as easily position us for a climb back to the highs. So, keep a close eye on that pivotal 50% level in each of the major indices this week because it represents a key support level.
In addition to the Fibo levels, notice that SPY and DIA each have support of their 20 and 50-day moving averages, which are converging at approximately the 50% level. QQQ has support of its 20 and 100-day moving averages. There is also price congestion from the end of February that should act as support. All of these factors make it unlikely that we will trade much below the 50% level this week, but anything is possible since we remain in a news-driven market. The bottom line is that there is not really much happening on an intraday basis except the war. Therefore, be selective with your intraday trades or you are likely to get chopped up in the numerous failed breakouts and breakdowns. Most importantly, remember that volume leads price! Without an increase in volume, it’s unlikely we will see any smooth intraday trends.
Finally, remember that today is the last day of the month AND the last day of the quarter. This means we are likely to see the “window dressing” effect by mutual funds. This occurs when fund managers rush to adjust their portfolios on the last day of the calendar quarter by buying the hottest stocks of the past quarter and dumping the weakest ones so their quarterly reports give the impression that they were in the right stocks for the entire quarter. This often causes moves that you would not otherwise expect in certain stocks that have been extremely strong or weak during the past quarter.
Today’s watch list:
HHH – Internet HOLDR
Trigger = $29.90 (below the 2-day low)
Target = $28.80 (just above first 38.2% Fibo retracement)
Stop = $30.45 (above high of March 28)
Notes = As subscribers to our ETF Real-Time Room already know, we initially shorted HHH on Friday as an intraday trade, but the trade worked out well and closed at the lows so we took it short over the weekend. The trade is now a good setup for a swing trade, so we are additionally listing it as a play for today. If this triggers, it will be managed as a separate trade from Friday’s entry in the ETF Real-Time Room. HHH does not trade much volume every day, but remember this is less relevant with ETFs because the bid/ask price is going to move wherever the underlying prices of the stocks move, regardless of supply or demand of the actual ETF. Therefore, as long as you use a limit order, you should have no liquidity problems with trading this sector HOLDR. One helpful tip is to follow the index of HHH rather than following HHH. The index is $HHI.X and it will accurately show you the fair value of HHH at any given moment, even when HHH is trading with a 10 cent spread. You can then use a limit order to buy or sell HHH near the actual price as represented by $HHI.X.
Although the Internet stocks have been showing relative strength to the broad market lately, it appears they are running out of gas and are about to roll over. Notice how the hourly trendline support was broken on Friday and HHH closed near the lows of the prior day. A break below the low of the past two days should trigger a selloff. EBAY, one of the largest components in the index, started to lose some momentum on Friday and is likely to follow through today as well. Keep an eye on YHOO and AMZN also because following the leaders of the index will give you an idea of where HHH is headed. Finally, remember the MTG Opening Gap Rules, which means we will not short HHH unless it trades below its 20-minute low.
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 = + 1.55, open P/L = + $153
QQQ long (HALF position from March 25) –
bought 26.14, stop at 25.10, target of 28.75, open points = (0.06), open P/L = + ($14)
Notes: DIA did not trigger from Friday’s newsletter because of the MTG Opening Gap Rules. Per an e-mail alert, we cancelled the trade setup going into the afternoon session. BBH came within 10 cents of triggering on Friday, but once again ran into resistance at 95.50.
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
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