The major indices finally broke out of the daily consolidation pattern we have been discussing for the past few days. As I pointed out in yesterday’s newsletter, the big moves usually come when the least number of participants expect them and that is exactly what happened yesterday. Rather than gapping up to open above the consolidation and subsequently rallying, the market did the opposite yesterday as it actually gapped down to the lows of the previous day. After clearing all the sellers out of the way, the market sharply reversed off the lows and was testing the previous day’s high within the first hour of trading. After retracing one more time and shaking more sellers out of the market, the major indices rallied back up to break the highs and never looked back for the rest of the day. Each of the major indices spent the entire day in the type of smooth and steady uptrend we have not seen for quite a while. Most importantly, total market volume was strong yesterday, which was necessary in order to confirm the breakout. Volume in the NYSE was just over 1.6 billion shares, the highest we have seen since the most recent strong uptrending day on March 21. The strong volume, combined with the technical break of key resistance levels on both the daily and weekly charts, combined to form the impetus for the perfect uptrend we saw yesterday.
Without a doubt, many traders sold out their long positions for net losses after the opening gap down and failed to re-enter their long positions when the market reversed, leaving them staring at the rally as they remained in cash. Even worse, I’m sure there were quite a few traders who even attempted to short the rally as an act of revenge trading because they sold their long positions at the bottom. How do I know these things for certain? Because that was me many years ago! One of the reasons I write this newsletter every day is because I enjoy sharing my lessons from the “School of Hard Knocks” with new traders who have not yet paid their tuition fees. If I am able to prevent just one trader from making some of the same mistakes I made in the early years of my career, then I am doing my job. Here is a clear example of what I am referring to. . .
Although we were among the group of traders who bailed out of our long positions into the opening gap down, at the lows of the day, we still ended the day with solid profits (including unrealized gains on open positions). We turned the day around by re-evaluating the market after the first hour and concluding that it was probably headed much higher due to the strong volume and momentum of the sharp reversal off the lows that broke the key resistance levels on the daily charts. As such, we scaled into positions of both SPY and QQQ and sat on them the remainder of the day, trailing a stop progressively higher. We took profits on 3/4 of our position size near the highs of the day and subsequently re-purchased shares at a lower price, which we took overnight. If we had stayed in our opening long positions the whole day instead of selling at the lows, we would have netted over 2 points of profit on SPY. Instead, we netted 1 point of profit because we re-purchased SPY at a higher price, only after it confirmed the breakout, which pointed to even higher prices. But guess what? I could not care less that we only made 1 point instead of 2 because we stuck to our trading plan and were not afraid to re-purchase the shares at a price that was an entire point higher than where we sold just an hour earlier. Professional traders don’t care about the price they sold their last shares at because they realize each new trade is totally independent of the last. One point of profit is better than zero points, which is exactly what I would have netted if this same scenario had happened to me prior to my graduation from the “School of Hard Knocks.” So, if you missed the rally yesterday, don’t feel bad about it. There were valuable lessons to be learned from yesterday’s market action and as long as you learn from your mistakes, you are consistently moving ahead on the right path and paying your tuition.
Yesterday’s breakout in the market was broad-based and every major index participated. Even the laggard of the past few weeks, DIA (Dow Jones Industrials), was strong yesterday. As we have been discussing, this is a key index that needed to begin moving with the broad market in order to confirm any breakouts and that is what it did yesterday. SPY (S&P 500) had the most relative strength yesterday and minor relative weakness could be seen in QQQ (Nasdaq 100). However, this is what we would expect to see because SPY had been lagging QQQ over the past month and it needed to catch up in order to get in sync. The Biotech HOLDR (BBH) was one of the strongest sectors yesterday, which benefited our open position in BBH we have been holding from a price of 93.09. The Semiconductor HOLDR (SMH) broke out and closed at a new high of 2003 yesterday, although the SOX index itself did not close at a new high of the year. Financials and Pharmaceuticals were also very strong and led the way for the rally in the S&P. When doing our scanning last evening, we noticed there were many individual sectors that broke above their 200-day moving averages for the first time in a year or two. As more and more sectors begin to rise back above their 200-day MAs, this will begin to provide a support base for the broad market that could potentially enable a decent intermediate-term rally, although there is still a lot of overhead resistance. Since the strength of yesterday’s rally caused most of the major indices to break above resistance levels on their daily charts, let’s take look at the longer, more important time frame of weekly charts. We will begin by looking at a weekly chart of SPY (S&P 500):
Notice that SPY closed above its 50-week moving average for the first time since March of 2002, more than one year ago. At that time, it only stayed there for a few weeks before heading back down. Therefore, keep a close eye on this level in the coming weeks. If SPY can hold above this 50-week moving average for more than a few weeks, the 20-week MA will rise up to cross above the 50-week MA, indicating a reversal in the intermediate-term trend. There’s still a long way to go in order for that to happen, but I wanted you to be aware of that level.
SPY is also approaching the upper channel resistance of a downtrend line that has been in place since the start of the bear market back in August of 2000. This certainly will be a difficult level for SPY to break through, but in the short term, we at least expect SPY to rally up to that trendline, which converges with horizontal price resistance around $93.50. So, we expect to see another 2 – 3 points of upside gains in SPY during the next few days to a week. Next we’ll take a look at the weekly chart of DIA (Dow Jones Industrials):
The weekly chart of DIA clearly shows the relative weakness the Dow has been exhibiting during the past few weeks. Unlike SPY, DIA is still below its 50-week moving average, which is converging with the upper channel resistance of the downtrend line. There is also resistance of a triple top at that same price level. If DIA breaks the triple top, 50-week MA, and downtrend line, it will be pretty impressive; but it won’t be easy. Keep a close eye on this level because if DIA is unable to break this trendline and hence its 50-week moving average, it could put a damper on the party and stop the rally in the S&P and Nasdaq. Finally, we’ll take a look at QQQ (Nasdaq 100):
QQQ remains the most bullish of the three major indices on an intermediate-term basis and is the only index that has been trading above its prior weekly downtrend line for the past month. The 20-week MA is just starting to cross over the 50-week MA and, if it holds, will serve to provide a decent base of support for the Nasdaq in the coming months. ADX and CCI, two indicators we follow but have not illustrated above, are also confirming a strong uptrend on the QQQ weekly chart.
You may have noticed that QQQ closed only 4 cents below its high of 2003. With today’s opening gap up, QQQ will be trading at a new high year-to-date. The next price target for QQQ in the short-term is its swing high of 28.79, which is the high of December 2, 2002.
Due to the strength of yesterday’s rally, we would not be surprised to see a small correction today, either in the form of a Fibonacci retracement or sideways consolidation (correction by time). However, if the market gaps up and holds the gap into the first 30 minutes of trading, we could just as easily enter into another uptrending day. It’s too early to determine which will occur, but be prepared to add to your SPY and QQQ positions from overnight. There is support on SPY at 90.85, so a retracement to that area would be an ideal place to buy more shares to hold for the next several days. Support on QQQ is at 27.25 – 27.35 area. Positive earnings reports from EBAY and AMGN may spike the Nasdaq today, so watch those Qs.
Today’s watch list:
Since we are already in four positions overnight (SPY, QQQ, IEF, BBH), we will focus on managing (adding more shares, selling shares) our open positions today. If we spot any new plays for swing trading, we will send you an intraday 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). Net P/L figures are based on the quantity of shares represented in the MTG Position Sizing Model.
(see notes below)
SPY long (1/2 position from April 22) –
bought 90.18 (avg.), stop at 90.50, target 93.50, unrealized points = + 1.17, unrealized P/L = + $115
QQQ long (1/2 position from April 22) –
bought 27.05 (avg.), stop at 27.10, target 28.70, unrealized points = + 0.37, unrealized P/L = + $71
IEF short (1/2 position from April 9) –
shorted 85.87, new stop at 86.25, target of 84.00, unrealized points = + 0.36, unrealized P/L = + $34
Will update you on yesterday’s exit prices of SPY and QQQ in the next newsletter.
Still long BBH from 93.09 with a 5 point unrealized gain, though not listed above because it was initially called in the ETF Real-Time Room. IEF short continues to grind lower each day and we now plan on ADDING another 1/2 position to the short IF it trades BELOW 85.15.
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