Yesterday’s opening gap up and subsequent rally was textbook picture-perfect! Due to strong volume, the intraday trend was very smooth and enabled one to buy each retracement and sell into the rally. If you have been closely reading and digesting our analysis over the past several weeks since the March rally and subsequent retracement began, you should have been fully prepared for a strong breakout in the broad market sometime this week (which occurred yesterday). We were fully prepared with a handful of swing trades going into yesterday morning and further profited with several low-risk intraday trades we entered in the ETF Real-Time Room.
Since the retracement from the March rally began on March 22, we have been thoroughly analyzing each of the major indices and discussing key pivot points in order to anticipate the short-term direction of the market. Although the media was attributing yesterday’s rally to “signs that the war is going more in the favor of the coalition troops,” we, as technical analysts and traders, know the truth — the technicals all pointed to higher prices! II personally find it amusing how the media always has a lame reason why the market is up or down for the day, usually of which is not related at all to what is really happening. Anyway, in case you were sleeping in class, let’s quickly review the key technical factors that have taken place since the rally began on March 12.
The first and most important technical indicator is always volume. If you have been a subscriber since the beginning of March, you may recall that the sharp increase in total market volume that began on March 12 and lasted for two weeks really caught our attention and made us realize that the odds were good that the rally was something substantial and more than just a “short-covering rally.” Why? Because volume was in each of the major indices was the highest of the year. In some cases, such as with QQQ, there were a few days in which the volume was the highest we had seen in more than a year! Most importantly, the mid-March rally in QQQ put the Nasdaq 100 index ABOVE the trendline resistance of a downtrend that had previously been in place for two years! You may recall we have shown you the WEEKLY chart of QQQ many times since then because it was a very key break of resistance.
When the retracement began on March 22, we again followed volume closely to see how it changed. As expected, the volume dropped dramatically during the retracement, meaning that many of the people who bought the rally were not immediately turning around and selling into it. The market drifted lower not due to an abundance of sellers but rather due to the buyers taking a rest. Finally, when the market began showing signs of bouncing off the 50% retracement level, volume began increasing again. The volume on April 1 told the tale as it was much stronger than any single day during the retracement AND the advancing volume outpaced declining volume by about 3 to 1. This hinted that the market was ready to head back up again, which often occurs sharply and swiftly because the sellers were already absorbed during the previous week.
In addition to the volume analysis, we were closely watching each of the major indices to see how much they retraced off their highs. If a rally is for real and is the start of something substantial, you will typically not see retracements of more than 50%. As such, we were closely watching the major indices to ensure they did not retrace below the 50% level. SPY and DIA both retraced perfectly down to the 50% level and immediately found support and headed back higher. QQQ retraced slightly more than 50%, but we discounted that because the Nasdaq had a “head start” and was out of sync with the S&P and Dow anyway. The bounce off the 50% retracement level immediately put both SPY and DIA above their 20 and 50-day moving averages, which further confirmed and provided price support that could act as a springboard to move the market back up again.
Finally, going into yesterday, we were watching the upper channel resistance of the trendline from the March 21 highs, connecting with the highs of each of the retracement days. We knew that if the market got above that trendline, there was not much in the way to prevent it from heading back up to test the highs of March 21, which is what the market is once again on its way to do. You may wish to review and study the daily newsletters from each day during the past week in order to make sure you fully understood the analysis that led us to believe the market was heading higher.
Needless to say, the market seems to be in the mode of shrugging off any bad news, both related to the war and the economy. When this occurs, it is a sign that sentiment has changed to the bullish side and your best bet overall is to buy the pullbacks and sell into the rallies versus selling short into strength and covering during the selloffs. Yesterday’s breakout confirmed our bullish stance and, although we remain cautious about the uncertainties of the war, we feel the market has begun to factor in any uncertain outcomes with the situation in Baghdad, barring perhaps, the use of chemical weapons. From a purely technical basis, the market looks poised to head higher over the next several days/weeks. There is broad market confirmation in all the major indices and most of the industry sectors. In fact, SPY and DIA are both approaching very important tests of resistance that, if broken, could shoot SPY and DIA much higher from here. Take a look at the daily chart of SPY below (the DIA chart looks similar too):
I have annotated several important points on the daily chart of SPY above. Most importantly, notice that SPY is once again approaching resistance of its 200-day moving average. The 200-day moving average market the exact high of the rally’s peak on March 21. Notice also how the 200-day moving average perfectly lines up with the upper channel resistance of the downtrend from December 2002. This convergence makes the resistance even more powerful, meaning that the resistance will be more difficult to break. However, look out above if SPY breaks through because it will likely spark a very strong rally that could set a bullish tone for trading that lasts the rest of the year. You will also notice that the 20-day moving average has crossed over the 50-day, indicating a change in the daily trend of SPY. Finally, notice that each of the other tests of the 200-day moving average were subsequently followed by LOWER LOWS in SPY. However, this marks the first time where SPY has tested the 200-day moving average and subsequently set a HIGHER LOW. All of these signals are quite bullish, so be prepared for the break of the 200-day moving average so that you don’t miss a big rally. Obviously, the most important thing to keep your eyes on today is the 200-day moving average of SPY and DIA. If/when either one of these indices gets above the 200-day MA, be ready to buy the first subsequent pullback to support.
Finally, as a side note, each of you should have received an e-mail from us yesterday afternoon explaining our bonus “freebies” if you register for the Live ETF Trading Workshop in Las Vegas by no later than April 15. The workshop is going to be extremely educational and will increase your trading profits because you will be seeing us trade our own account in real-time, using real capital! If you have ever wondered exactly how we make our trading decisions in real-time during the day, this is your chance to find out first hand. You can review the special early-bird bonuses by clicking here.
Today’s watch list:
IWM – iShares Russell 2000 Index (small caps)
Trigger = above $75.10 (above upper channel resistance of the downtrend from March 21 high)
Target = $76.40 (resistance of 200-day MA)
Stop = $74.50 (below yesterday’s close)
Notes = IWM is showing a lot of relative strength because it is one of the only broad-based indices that has already rallied back to its March 21 high. Therefore, it should break that level and set new highs, right up to its 200-day MA, if the market is strong today.
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 (full position from April 1) –
shorted 88.36 (avg.), covered at 87.60, points = + 0.76, net P/L = + $147
BBH long (from March 25) –
bought 93.05, stop at 89.20, target of 101.20, open points = + 4.45, open P/L = + $443
QQQ long (from March 25 and April 2) –
bought 26.14 (avg.), stop at 24.90, target of 28.75, open points = + 0.22, open P/L = + $82
We covered the TLT short on the opening gap down for a 76 cent profit from overnight. Shorting the 20-year T-bond ETF was fun! We also bought a half position of QQQ at 26.13 yesterday to add to the swing trade from our initial entry on March 25. This gives us a full position of both BBH and QQQ now. If you have not done so in a while, this is a good time to review the MTG Position Sizing Model to ensure that you are probably adjusting your share sizes based on each specific ETF.
Notice we have trailed the stops higher in both the BBH and QQQ “multi-week swing” trades and will continue to do so as both positions become closer to their target prices. With the profit buffer increasing in both of these positions, you may also consider closing any option positions you were using to hedge as an insurance policy.
BBH finally broke out above 95.50 and we netted nearly a point of profit by daytrading BBH in the ETF Real-Time Room yesterday. We also bought the mid-afternoon pullback in both SPY and QQQ yesterday and sold both for profits an hour later, at the highs of the day. Profits from those intraday trades will be reported separately in the next Wagner Weekly.
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