Although the major indices followed through with a monster gap up on the heels of last week’s consolidation, the market lost its opening momentum and settled into an intraday downtrend that lasted the entire day. The gap eventually became filled eventually in each of the major indices, causing the market to give back all of its huge opening gains. Despite yesterday’s reversal and selloff, we had an very profitable day yesterday by micro-managing our long positions from over the weekend and taking profits in the morning, near the highs of the day, as soon as we noticed various signs that the market was weakening. Primarily, this came in the form of early relative weakness in the Nasdaq futures, which failed to set a new high when the S&P did. We also spotted major weakness in the Biotech sector, a large percentage component of the Nasdaq, and didn’t like the lack of follow-through in that sector.
In hindsight, it would have been nice to sell short upon closing our various long positions, but there were not any clear signals that pointed to a low-risk entry point on the short side of the market. This was due to the various price levels that typically would have acted as support (200-day MAs, Fibonacci support, prior “swing highs,” et cetera). The risk/reward ratio was in the favor of either being in cash or being long in the afternoon. So, after attempting one intraday trade on the long side and getting stopped out, we chose to play it conservative and remain in cash for the rest of the day. We were happy with this decision because it enabled us to keep our significant gains from the morning session.
Yesterday was a clear example of why we always use stops. To be perfectly honest, I really did not expect the market to sell off yesterday and fill the gap. Instead, I anticipated an uptrending day because of the various technical reasons we have been discussing for the past week (break of weekly trendline resistance, 200-day MAs, follow-through on the consolidation , positive volume breadth, break of March 21 high, the gap held into the first reversal period, and so on). However, despite all the reasons why the market “should have” gone up, it did exactly the opposite of what we predicted and entered into a sharp downtrend that filled the gap. If it were not for strict adherence to stops, we would have given back much of our significant gains from the overnight positions we sold in the morning. The bottom line is that we did our analysis and felt very confident of what we expected to occur, but we were simply wrong! Let this be a good reminder to us all that, no matter how confident we feel about a particular trade setup, we need to ALWAYS adhere to our stops because the market can AND WILL prove you wrong when you least expect it.
As I studied all the charts and did my research last evening, I came across many mixed signals that are telling me today could become quite choppy. Some of these signals were bullish, while others were equally bearish. I will give you a summary of what I found. Let’s start by looking at the weekly charts.
SPY, DIA, and QQQ each closed on or above their 20-WEEK moving averages yesterday. QQQ continues to show the most bullish weekly chart because it is the only one of the three major indices that is ALSO above its 50-week moving average. Between the combination of the 20 and 50-week moving averages, QQQ has built a pretty solid base of support at the 25.50 area. In addition, both QQQ and SPY are also sitting ABOVE their prior weekly downtrend lines, which should provide price support. However, DIA has been showing relative weakness and is the only one of the three major indices that is still trading below its weekly downtrend line resistance. Since the Dow (DIA) is a bellwether index, it is crucial that the Dow follows suit if the rest of the broad market is to sustain a rally. Therefore, keep an eye on the weekly chart of the Dow (and DIA) during the next several days/weeks.
The daily charts of SPY and DIA are not looking nearly as good as they did going into last weekend because they now are showing a failed attempt at breaking above their 200-day moving averages after consolidating and gapping up above them. Although both SPY and DIA initially bounced off their 200-day MAs during yesterday’s selloff, they eventually broke below that key level. Therefore, the 200-day MA for SPY will now act as overhead resistance at 88.80, while the 200-day MA resistance for DIA is at 83.80. QQQ remains above all its key daily moving average levels and has a key support area at 26.00. However, we could see selling momentum kick in if QQQ breaks below the 25.90 area. It is also important to note that while DIA and QQQ both closed slightly above Friday’s closing prices, SPY actually closed slightly negative yesterday, indicating relative weakness. DIA also showed relative weakness yesterday morning because, unlike SPY which gapped above its prior high of March 21, DIA instead formed a perfect double top at its March 21 high. QQQ did the same thing. The daily chart of DIA below shows the double top, despite breaking its 200-day MA in the morning:
A final mixed signal we saw yesterday was in the total market volume. Total market volume in both the NYSE and Nasdaq yesterday was actually pretty heavy yesterday, indicating there was a fair amount of selling in the afternoon. However, the A/D ratio remained positive as advancing volume outnumbered declining volume by nearly 2 to 1. What do we make of this? It’s too early to tell, but it was definitely a mixed signal and we will continue to keep a close eye on volume the next several days for clues of what to expect next.
Going into today, keep an eye on the support level of the uptrend from the March 12 lows, which also corresponds with the 20-day moving averages on SPY, DIA, and QQQ. The secondary, steeper uptrend support line was from the lows of March 31, but that was broken yesterday and we now revert back to following the most significant primary trendline from the low of March 12. The daily chart of SPY below illustrates the primary trendline to watch today (DIA and QQQ charts look the same):
To make things simple, just watch the 20-day moving average on each of the major indices as a key support level that needs to hold in order for the uptrend to continue. This corresponds with the lows of last week’s consolidation period, after the April 2 gap up. As discussed, there are a lot of mixed signals today and I really don’t have much of an opinion on which way the market will go. Therefore, there’s no reason to be aggressive entering new trades until the market shows its hand. Furthermore, remember there is speculation that Hussein and his sons may have been killed in a bombing last night. While there is no proof of this, be careful out there and use stops because the market will undoubtedly rally sharply if it is proven to be true and you don’t want to be stuck on the short side if that happens.
Today’s watch list:
QQQ – Nasdaq 100 Index Tracking Stock
Trigger = below $25.90 (below daily consolidation and 20-day MA)
Target = $25.50 (weekly moving average support and daily price support)
Stop = $26.10 (above yesterday’s close)
Notes = Since the target is only 40 cents, this will likely be an intraday trade if it triggers. Those who cannot manage trades on an intraday basis should probably not enter this trade if it triggers.
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). Net P/L figures are based on the quantity of shares represented in the MTG Position Sizing Model.
BBH long (1/2 position from March 25) –
bought 93.05, sold 99.00, points = + 5.95, net P/L = + $295
SPY long (1/4 position from April 3) –
bought 88.54, sold 90.53, points = + 1.99, net P/L = + $196
QQQ long (1/2 position from March 25 and April 2) –
bought 26.14 (avg.), sold at 27.05 (avg.), points = + 0.91, net P/L = + $176
IWM long (1/2 position from April 3) –
bought 75.13, sold 76.22 (avg.), points = + 1.09, net P/L = + $53
QQQ long (1/2 position from March 25 and April 2) –
bought 26.14 (avg.), SEE NOTES BELOW FOR STOP, , open points = (0.05), open P/L = ($16)
SPY long (1/4 position from April 3) –
bought 88.54, SEE NOTES BELOW FOR STOP, open points = (0.49), open P/L = ($26)
We plan on selling both QQQ and SPY into the opening gap up because we want to be in cash until the market settles in. We can always re-enter, but it’s safer to sell into strength at this point. So, you can either sell pre-market or into the first bounce after the open.
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