Yesterday was an excellent reminder that no matter how many technical signals predict the market will act in a particular fashion, anything can happen! After a strong opening gap up on the heels of strong earnings reports by Microsoft and Intel yesterday morning, the major indices were poised to settle into an intraday uptrend, supported by the recent break of the 200-day moving average in SPY (S&P 500) and DIA (Dow Jones Industrials). However, the market immediately showed signs of weakness right out of the gates, particularly due to strength in the bond market and relative weakness in the Dow and S&P. After the market retraced into the 10:00 am reversal period, the Nasdaq began rallying and actually set a new high around 10:15 am. We expected this to pull the broad market higher, but there was too much divergence from the weakness in the Dow that caused the Nasdaq breakout to fail. From that point on, the major indices each settled into an intraday downtrend, which was led by the Dow and S&P the entire day. By the end of the day, the Dow was down 144 points while the Nasdaq closed up 3 points. Fortunately, we did a good job of micromanaging our long positions coming into the day and still locked in small profits from overnight through the use of trailing stops, despite the market’s sharp reversal to the downside.
While it’s not uncommon for opening gap ups to fail, we were a bit surprised that the market sold off so sharply because many indicators were pointing to potentially higher prices. In particular, we had the second consecutive day of the S&P and Dow’s closing prices above their 200-day MAs, as well as the break out of the daily congestion pattern that should have provided a support base. Volume was also strong in the after hours session on Tuesday night’s gap up in the futures, which was also bullish.
We have learned from experience that large percentage opening gap ups that occur after a market has consolidated and broken to the upside on heavy volume rarely fail. Nevertheless, it did yesterday and now we have a big mess on the daily charts. While QQQ held up much better, both SPY and DIA formed bearish engulfing candlesticks on their daily charts yesterday. This trapped many bulls who did not close their long positions and created a lot of overhead resistance the market will have to contend with on any comeback attempt. More importantly, yesterday’s selloff caused SPY and DIA to once again close below their 200-day moving averages. While all these factors indicate a potential bearish reversal in the broad market, we are cautious about getting aggressive on the short side at this time.
The Nasdaq closed in the upper third of the previous day’s trading range yesterday, which is also above its 20-day moving average (former resistance point). The Semiconductor Index, which often leads the broad market, still managed to close up more than 3.4%. The ratio of advancing volume to declining volume in the Nasdaq was positive and the Nasdaq TRIN was bullish yesterday. Furthermore, despite yesterday’s bearish action in SPY and DIA, both indices are still above support of their daily uptrend lines that started with the lows of March 12. Both indices are also above their 20-day moving averages. Finally, there is now convergence of 3 different moving averages (20, 100, and 200-day MA) each coming within the range of yesterday’s closing prices.
So, what do all these conflicting bullish and bearish signals tell us? Simply that we have a mess on the daily charts in which the market is just likely to go one direction as it is the other. The technical picture becomes even sloppier when you throw in the fact that today is likely to be marked by light volume due to the market being closed for Good Friday tomorrow and we are also in Passover. Many traders will be closing up shop early today, so it is not likely that the market will tip its hand today. Bottom line is that we’ll probably need to wait until Monday to really get a handle on where we go from here. Take it easy with your trading today and don’t overtrade if there are not any clear setups! Next week will probably offer much better risk/reward trade setups on both sides of the market, so let’s be patient.
Today’s watch list:
DIA – DIAMONDS (Dow Jones Industrial Average Tracking Stock)
Trigger = below $81.90 (below 20-day MA and yesterday’s low)
Target = $80.40 (50-week MA)
Stop = $82.60 (above yesterday’s low)
Notes = Although there is a good chance this trade does NOT trigger today, we will short DIA if it breaks below 81.90, which would also confirm break of the daily uptrend line from the March 12 lows. If, however, it does not break 81.90, it is too risky of a short.
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.
SPY long (1/2 position from April 15) –
bought 89.17, sold 89.53 (avg.), points = + 0.36, net P/L = + $32
QQQ long (1/2 from April 15 and 1/2 from April 16) –
bought 26.31 (avg.), sold 26.46 (avg.), points = + 0.15, net P/L = + $48
IEF short (1/2 position from April 9) –
shorted 85.87, new stop at 86.25, target of 84.00, unrealized points = + 0.11, unrealized P/L = + $9
Since we added to QQQ on the pullback yesterday morning and then scaled out of QQQ, average prices on the whole position are listed above. We also scaled out of SPY. We sold 1/2 of the EWZ position at 9.35 yesterday for nearly a 5% gain from Friday’s entry at 8.85, which was called in the ETF Real-Time Room. We may add to the IEF short today if it shows relative weakness.
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