Yesterday’s market action was much as you would expect to see on the day after a strong “gap and go” day (one in which the market gaps up and rallies off the gap). Since it is rare to have two consecutive days “gap and go” days, it is more common to see some type of correction on the second day. Remember that a correction does not mean, however, that the price of the market will necessarily retrace. If it does, that is known as a “correction by price” and we use Fibonacci levels to predict the extent of the retracement. But, it is actually more common to see a “correction by time” instead. This occurs when the market just trades sideways and consolidates within the upper third of the previous day’s range. This type of correction allows the market to “digest” the gains and causes the various intraday moving averages to rise up over time and provide price support. This is the same effect that is achieved through a “correction by price” except that a “correction by time” is generally considered to be more bullish because it indicates only a temporary pause from the buyers rather than an abundance of sellers.
For the most part, yesterday’s market action was fairly boring and uneventful for day trading, but was ideal for managing open “swing trade” positions. The challenge with intraday trading on consolidation days is that the range is often too narrow and choppy to enter good risk/reward day trades. As such, we simply focused on managing our open positions rather than attempting to trade intraday. A good example of this is that even though BBH (Biotechnology HOLDR) was strong and showing relative strength yesterday, it was not a very good risk/reward ratio to enter BBH for an intraday trade yesterday. However, since we already owned BBH coming into the day, we were still able to participate in its rally yesterday without exposing ourselves to the risk of entering a new trade at too high of a price. That’s why having at least a few “swing trades” during trending markets is important; they allow you to profit even on days that are not conducive for day trading.
The Nasdaq showed more relative strength than the S&P yesterday. Throughout most of the morning session, QQQ consolidated in the upper third of its intraday range while SPY consolidated in its lower third. Later in the afternoon, QQQ broke well above its morning high, but SPY formed a double top from its morning high instead. Finally, when the market sold off during the final hour of trading, presumably on fear of the unknown as troops enter Baghdad, SPY broke to a new low of the day but QQQ held the morning lows. This divergence with relative strength in the Nasdaq was clear the entire day and it was due primarily to strength in the Semiconductor and Biotechnology sectors.
Did you notice where yesterday’s rally in SPY stopped? That’s right, the 200-day MA we have been micro-focused on for the past several days. The chart daily chart of SPY below shows you how the 200-day MA, one of the most powerful of all moving averages, stopped the rally dead in its tracks:
The high of SPY yesterday was 88.99 and the 200-day MA was at 88.95. This further confirms our analysis yesterday that if SPY breaks the 200-day MA, it will spark a huge rally. Remember that the stronger the resistance level, which is also trendline resistance of over one year in this case, the stronger the rally will be if/when the market breaks through that resistance level. In addition to the daily chart, keep an eye on the trendline support that has started to form off the low of March 31. Notice how SPY closed right on that trendline support yesterday:
While it is important for SPY to hold above the lower channel support of this trendline, it is more important that SPY (and the other major indices) hold the gap from April 2. As long as the gap holds, it will serve to build a base of support, even if intraday trading becomes choppy.
After watching the S&P and Nasdaq futures overnight and in today’s pre-market, we have noticed that the futures seem to be reacting to every bit of war news that comes out, even more than usual. Although the futures spiked on the morning news that 2,500 Iraqi Republican Guard troops surrendered, the futures sold off shortly thereafter when news of the car bomb explosion hit the wires. The futures then became choppy as news surfaced that U.S. troops have discovered a stash of white powder and other chemical weapon material. My point in telling you this is to let you know that, based on the pre-market futures action, trading could become very choppy today. So, be careful not to overtrade UNLESS we clearly break out of the range of the past two days.
Today’s watch list:
Since we are already in four simultaneous positions, we are not listing any other trade setups today. We will instead focus on managing our open positions and will update you of any changes to stops or profit taking via e-mail alert.
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 (1/2 position from March 25) –
bought 93.05, sold 99.05, points = + 6.00, net P/L = + $298
IWM long (1/2 position from April 3) –
bought 75.13, sold 75.16, points = + 0.03, net P/L = + $1
BBH long (1/2 position from March 25) –
bought 93.05, stop at 92.40, target of 101.20, open points = + 4.96, open P/L = + $247
QQQ long (from March 25 and April 2) –
bought 26.14 (avg.), stop at 25.60, target of 28.75, open points = + 0.34, open P/L = + $133
IWM long (1/2 position from April 3) –
bought 75.13, stop at 74.30, target of 76.40, open points = (0.38), open P/L = ($40)
SPY long (1/2 position from April 3) –
bought 88.54, stop at 87.40, target of 90.80, open points = (0.84), open P/L = ($85)
We sold half of our BBH position yesterday for a profit of exactly six points! We are still long the second half of the position with a target of just over 101 and stop of 92.40 (per above). We also bought IWM yesterday, but sold half of it a few hours later because it was acting a bit weak. We took the second half overnight and new stop is listed above. Finally, we bought a half position of SPY (per a call in the ETF Real-Time Room) about an hour before the close with the intention of building a swing trade position in anticipation of breaking the 200-day MA.
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