Although the day started out a bit choppy, yesterday eventually turned into an uptrending day (albeit a sloppy one). However, there was clear divergence between the S&P and Nasdaq futures, with the Nasdaq showing relative weakness for most of the day. This was due largely to weakness in a few technology-related sectors such as the Internets, Networkers, and Hardware stocks. Aside from those few pockets of weakness, the broad market held up pretty well. More importantly, several key technical indicators we have been watching showed us bullish confirmation yesterday that should potentially lead the way for higher prices, most likely new highs of the year, to be set in the short term.
The most significant technical is that each of the major indices held the previous day’s lows. As discussed in yesterday’s newsletter, this was very important because a break below Monday’s lows would have represented a price retracement of more than 50% from the March 12 low to the March 21 high. This in turn would have increased the likelihood of the rally completely collapsing. Instead, the major indices attempted to rally off the 50% retracement level and the S&P closed near its intraday high. The Nasdaq, on the other hand, was weaker and closed in the lower third of its range.
Going into yesterday morning, we discussed the importance of SPY and DIA getting back above their 20 and 50-day moving averages in order to provide price support for a continuation rally. If SPY and DIA could get above those moving averages, we discussed the next key resistance level would be the 38.2% retracement level, which was formerly support. Beyond that, the next resistance level was the highs of March 31. So, how did each of the major indices perform yesterday? Let’s take a quick look at each of the daily charts. We’ll begin by looking at the most diverse broad-based ETF, which is SPY (S&P 500 Index):
As you can see, SPY gapped up and actually found support at the 20 and 50-day moving averages, easily closing above both of them. This is important because it means the break of these moving averages was never confirmed beyond Monday. You will also notice that SPY managed to close above its 38.2% retracement level, which acted as resistance going into yesterday morning. Finally, SPY traded above Monday’s high on an intraday basis and then sold off to close EXACTLY at resistance of Monday’s high. Overall, an impressive recovery for SPY and one that was technically significant. If SPY holds above its 38.2% retracement today, it will likely begin climbing back up to test the March 21 high. However, be very cautious if SPY drops back below 85.85 today, which is the 38.2% retracement level. Now let’s take a look at DIA (Dow Jones Indu. Avg. Index):
Like SPY, DIA also found support at its 20 and 50-day moving averages and closed well above both of those levels. Again, this is very important. However, unlike SPY, DIA has not yet broken back above its 38.2% retracement level. In fact, notice that yesterday’s high was exactly equal to resistance of the 38.2% retracement. Pretty cool, isn’t it? DIA briefly probed above Monday’s high, but closed slightly below it. So, as you can see, SPY was relatively stronger than DIA yesterday and we therefore need DIA to trade above yesterday’s high of 81.11 in order to confirm the break of key resistance at the 38.2% retracement level. Finally, we’ll look at the action in QQQ (Nasdaq 100 Index):
As we analyzed yesterday, QQQ retraced more than 50% on Monday but was not surprising given the fact that the Nasdaq had gotten ahead of the rest of the broad market. Likewise, it was also not shocking that the Nasdaq showed relative weakness yesterday. Unlike SPY and DIA, QQQ did not rally back up to its 38.2% retracement level. In fact, QQQ only rallied enough to close right on its 50% retracement at 25.45. Also notice how QQQ ran into resistance of its 20-day moving average yesterday, which marked the intraday high. You may also recall that QQQ has resistance of its 20 AND 50-WEEK moving averages at 25.60 and 25.55 respectively (consult a weekly chart of QQQ). Without a doubt, those weekly moving averages contributed to resistance in the Nasdaq yesterday. Since the broad market rarely goes anywhere without the Nasdaq, we need to continue keeping a close eye on QQQ. If the Nasdaq gets a jolt and is able to rally above its 38.2% retracement, it will undoubtedly spark another rally by confirming the rally attempts in SPY and DIA. However, if QQQ cannot break above the highs of the past two days, it could potentially let the air out of the SPY and DIA rally attempts. The Nasdaq performance is key!
Perhaps the most positive thing that occurred yesterday was an increase in volume AND the advancing/declining ratio. Total marke volume in the NYSE came in slightly higher than the previous day, but more importantly, the advancing volume outpaced declining volume by more than 2 to 1. This was the opposite of what we saw on Monday when declining volume led advancing volume by more than 3 to 1. This sudden shift means that not only was total market volume higher yesterday, but a much higher percentage of the volume was on advancing shares. This is very bullish and was necessary in order to confirm the reversals of SPY and DIA. The Nasdaq total market volume was not as impressive, but the Nasdaq advancing/declining volume ratio was positive.
Going into today, keep an eye on the trendline resistance from the high of March 25 for both SPY and DIA. The hourly chart of SPY below illustrates this (the DIA chart looks similar):
You can clearly see the trendline resistance that needs to be broken in order to spark a rally. Also notice how the trendline exactly correlates to the 40-period moving average, which is something you will often find on hourly charts. Basically, yesterday’s high is the key. If SPY and DIA get above yesterday’s highs, you could buy them and put your stop just below yesterday’s close, making for a relatively good risk/reward trade. The hourly chart of QQQ has a slightly different trendline, but the key on QQQ is the 25.70 level, above the two-day high.
Not surprisingly, we are seeing a strong pre-market opening gap in the futures markets. While the media will undoubtedly attribute this to some type of positive development in the war, we prefer to blame it on the technicals. As we have been closely analyzing the past several days, we knew that a sharp gap and rally could happen any day now, especially with SPY and DIA confirming the break above the 38.2% retracement levels. This pre-market gap should also kick QQQ in gear, which is very necessary for confirmation. The opening gap up will certainly benefit our swing trades which consist of QQQ and BBH long, as well as the TLT (20-year T-bond) short. Because the bond market usually trades in an inverse relationship to the equities markets, we should see a decent gap down on TLT. The strong opening gaps often occur without warning and that is the reason we have been carrying these swing trades. As you know, it is often tricky to enter new intraday trades after a large opening gap if you do not already have open positions from overnight. If the gap holds into the first 30 minutes, we will probably enter into an uptrending or at least sideways day. However, I would be careful about entering any new trades until the gap confirms it will hold into the first reversal period. Consult the MTG Opening Gap Rules for more details on trading and managing gaps.
Today’s watch list:
QQQ – Nasdaq 100 Index Tracking Stock
Trigger = above $26.10 (above upper channel resistance of the downtrend from March 21 high)
Target = $28.75 (high of December 2, 2002)
Stop = $24.90 (below 61.8% retracement)
Notes = This will be the addition of the second half of the position size for the QQQ swing trade that was initiated on March 25. We wanted to wait for confirmation of the rally before adding the second half of the share size to our QQQ trade, and this will give us the confirmation if it triggers today. Again, this trade may take one to two weeks to hit its target and we recommend you hedge with options due to the war uncertainties.
Watch BBH for a potential breakout above $95.50 today. It has tested that level about six times during the past month and odds are pretty good it will break out soon because AMGN is also ready to bust through its $59 resistance after consolidating for weeks. We are already long BBH from $93.05, but you could consider daytrading the position separately if it broke above $95.50.
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).
TLT short (2/3 position from April 1) –
shorted 88.60, covered at 88.02 (avg.), points = + 0.58, net P/L = + $73
TLT short (full position from April 1) –
shorted 88.36 (avg.), stop at 88.65, target of 87.50, open points = + 0.09, open P/L = + $3
BBH long (from March 25) –
bought 93.05, stop at 89.20, target of 101.20, open points = + 1.10, open P/L = + $109
QQQ long (HALF position from March 25) –
bought 26.14, stop at 24.90, target of 28.75, open points = (0.69), open P/L = ($142)
Per an e-mail alert, we shorted TLT yesterday morning and later covered 2/3 of the position for a nice profit. We then took the remaining 1/3 shares overnight and added another 2/3 shares before the close, lowering our average price to 88.36 on the overnight shares. We are also still short IEF (10 year t-bond) from a call in the ETF Real-Time Room last Friday, but that will be reported with the rest of the Real-Time Room calls in the next weekly newsletter.
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