As anticipated, the market broke out of Tuesday’s narrow range yesterday and developed into a trending day. What was not anticipated, however, was both the market’s break out to the upside and then its sharp and sudden reversal that broke the previous day’s lows! As global television footage of Iraqis celebrating in the streets was being aired when the market opened, it seemed to provide a “feel good” atmosphere that gave the major indices a positive bias and sparked a sharp rally and subsequent breakout above the previous day’s highs in both SPY (S&P 500) and DIA (Dow Jones 30). Although both SPY and DIA broke out in the morning and consolidated at their highs for nearly an hour, relative weakness in the Nasdaq caused QQQ to lag and form a double top at its previous day’s high instead. This inability of the Nasdaq to break out weighed heavily on both the S&P and Dow and eventually caused the break out to fail. The 200-day MAs of both SPY and DIA acted as additional resistance. Strangely, the major indices began collapsing almost immediately in synchronization with the now infamous images of the toppling of the Hussein statue. By 12 noon EST, not only had the market given back all its gains from the morning break out, but it had actually broken the lows of the previous day! After this sharp reversal, the major indices settled into a downtrend that lasted through the rest of the day.
While many traders would have perhaps preferred to see an intraday uptrend instead, it really did not matter much to us because we were simply pleased to see a steady trend. Even though we realized small losses from initial long entries in both SPY and DIA, we immediately cut the losses and entered a few short positions in HHH and RTH, two of the weakest sectors, as soon as we realized the uptrend was reversing. This enabled us to have a profitable day, despite early losses from the failed break out. Yesterday was a great day for reinforcing the importance of being flexible and unemotional with regard to making sudden changes in your intraday trading plan. Despite the fact we had long positions in the morning and were initially thinking in terms of an upward bias, we immediately bailed out of our long positions and made a quick change to the short side of the market once the market provided the proper signals to do so. If we had taken any time to rationalize or hope our long positions would improve, our minor losses would have turned into major losses. More importantly, we would have missed the opportunities to profit from the short side of the market because we would have been to busy managing and dealing with bad trades. Therefore, the greatest cost by not cutting losses quickly is often not the actual capital lost on the bad trade, but rather in the “opportunity cost” of missing other good trades instead. The point in telling you all this is to remind you of the importance of always being a nimble trader!
QQQ broke the 26.00 base of support yesterday, which has now created a lot of overhead resistance at that price. However, there is big support here at the 25.50 level from the 20 and 50-WEEK moving averages. In addition, QQQ still has its 20, 50, and 200-day moving averages beneath it to act as support. While I’m not confident that QQQ will zip back up to the highs anytime soon, I also don’t think it will collapse in the short term either. It will likely remain choppy for a while and as such, you may want to focus on trading some of the sector HOLDRS or other broad-based indices rather than QQQ. The daily charts of SPY and DIA are a little cleaner than QQQ.
The broad-based selloff yesterday put both SPY and DIA exactly on support of the lower channel of their uptrend lines from the lows of March 12. This trendline line up directly with the 20-day MA on each chart as well. The daily charts of SPY and DIA below illustrate this:
As you can see from the charts above, the next several days will be crucial in determining whether the uptrend that began on March 12 remains intact and we head back up or whether the trendline support becomes broken and we enter into choppy, range-bound trading. We could easily bounce off these trendlines and quickly erase yesterday’s losses, but we could just as easily break support and see another downtrending day. Personally, I don’t have much of an opinion as to what will occur one way or the other because we are still continuing to see mixed signals. The best strategy is probably to remain mostly in cash so that you can be nimble and ready to jump on the next opportunity, regardless of which direction it is.
Although Bush cautions that dangers still exist in Iraq and the war may not be over, the market seems to have, for the most part, already factored in its closure. Therefore, we are likely to continue seeing any war-related news affect the markets less every day. This means the market action will need to once again return to fundamentals, which traders are still trying to figure out whether they are bullish or bearish. As I said a few days ago, there is no reason to be aggressive on either side of the market right now until the market figures out which way to go next. We’ll be ready for either direction.
Today’s watch list:
SPY – SPYDERS (S&P 500 Index Tracking Stock)
Trigger = above $87.80 (above yesterday afternoon’s swing high)
Target = $89.05 (just below yesterday’s high)
Stop = $87.20 (below 20-MA/15 min.)
Notes = We want to have a long entry point ready in the event that SPY bounces off its daily trendline support illustrated above. However, we don’t want to simply “bottom fish” either. Therefore, we will make SPY confirm its reversal by getting back above its April 2 gap before going long.
DIA – DIAMONDS (Dow Jones 30 Tracking Stock)
Trigger = below $81.90 (below yesterday’s low, trendline support, and 20-day MA)
Target = $81.10 (high of April 1)
Stop = $82.30 (above yesterday’s close)
Notes = On the other hand, we want to be prepared to short the broad-based indices in the event the trendline fails to hold. DIA is a clear short setup below its 20-day MA. Remember to use the MTG Opening Gap Rules to prevent shorting a gap down below the trigger price without confirmation first.
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.
RTH short (from April 9) –
shorted 73.45, will cover on the open (see notes below), target of 72.00, unrealized points = + 0.87, unrealized P/L = + $85
IEF short (1/2 position from April 9) –
shorted 85.87, stop at 86.70, target of 84.00, unrealized points = (0.09), unrealized P/L = ($10)
We shorted RTH yesterday per the setup in The Wagner Daily and currently have an unrealized gain of just under one point. We will be looking to cover RTH quickly into ANY OPENING GAP DOWN because there is a good chance the market bounces today. If RTH gaps up instead, we will mark the 5-minute highs and use that level as our new stop.
IEF was originally called in the ETF Real-Time Room yesterday, but we are listing it here since we e-mailed you an alert informing you of our entry. We are only short 1/2 position so far, but will add to it as it becomes “in the money.” Projected time horizon on IEF is one to three weeks.
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