On an intraday basis, yesterday’s market action was marked with indecision that resembled a tug-of-war between the bulls and bears. Each of the major indices gapped down and opened near the lows of the previous day, rallied into the first hour, quickly sold off to set new intraday lows, slowly rallied back to set new intraday highs, then sold off to close in the middle of the intraday range. Yesterday’s trading range was relatively narrow compared to recent market action, so that aided in preventing whipsaws of great proportions. We played the day perfectly by sitting on our hands and not attempting to profit from intraday trades. Instead of trying to guess who was going to win yesterday’s tug-of-war, we focused on simply managing our existing multi-day “swing trades,” which is usually a better choice than trying to profit from intraday moves in an indecisive market. Remember that cash is often the most profitable trade you can make. The most profitable traders I know are consistently sitting OUT of the market more than they are actually in the market.
In the context of the past two weeks, yesterday was simply an extension of the consolidation that began on April 23. Each of the major indices remain above support of their primary uptrend lines of the past several weeks. My preferred charting interval to assist in determining market direction over the next several days is the hourly (60-minute) chart. Looking at an hourly chart of QQQ (Nasdaq 100), it illustrates how the index is still trading within the channel of its uptrend of the past two weeks. Notice also how closely the 20-period moving average parallels the mechanical uptrend line:
Although QQQ is still within the channels of its hourly uptrend line, notice that QQQ formed a double top yesterday (which I have circled in purple). Because the double top occurred during a consolidation period, we cannot place too much emphasis on its importance. However, the highs of the past two days are definitely a level to keep an eye on today because if QQQ does not break that resistance today, it will most likely break the hourly uptrend line and could potentially see a large selloff. As we discussed yesterday, the 1467 level on the Nasdaq Composite (COMPX) continues to be a crucial level to watch and that level corresponds roughly with 27.75 on QQQ. If the COMPX finally breaks 1467, it should be able to smoothly make its way up to its next resistance at 1521. This would loosely correspond to a break above 27.80 in QQQ, which would be a relatively low-risk entry point to go long with a target of 28.79. In case you forgot why 1467 is so important, here is yesterday’s daily chart of the Nasdaq Composite that illustrates it:
No matter how strong the Nasdaq looks, the Dow continues to show relative weakness, both on the daily charts and on an intraday basis. The Nasdaq held the lows of April 23 during yesterday’s selloff and eventually rallied up to test the previous day’s high. The Dow, on the other hand, traded well below its April 23 low and did not have enough momentum to rally up to its April 23 high. That divergence continues to be the biggest single factor that could cause the recent rally to collapse. If the blue chips can’t get going, it’s unlikely the rest of the market is going anywhere either. So, until we see the Dow start to confirm the strength in the Nasdaq and S&P, we remain cautious with regard to how much higher the broad market will go.
With the busiest week of earnings season concluding today, traders will begin paying more attention to general economic data from the Feds. There are several economic reports due out today that, when combined, are likely to set the tone of the market direction today. GDP report is due at 8:30 am EST and expectation is 1.9%, Michigan Sentiment is due at 9:45 am with an expectation of 85, and both new and existing home sales reports are due at 10 am. With all these reports being released within the first thirty minutes of trading, it could become rather volatile in the morning session. Therefore, be careful not to overtrade and let the clear trade setups present themselves to you. If you don’t see any, then don’t force them to happen. Remember that CAPITAL PRESERVATION must always be your number one priority before you even worry about making a dime of profits!
Today’s watch list:
QQQ – Nasdaq 100 Index Tracking Stock
Trigger = above $27.82 (above high of prior two days)
Target = $28.75 (prior high of December 2002)
Stop = $27.35 (below lower channel of hourly uptrend)
Notes = This setup is explained in commentary above. We’re looking for a break above 1467 in the Nasdaq Composite and will ONLY buy QQQ if the Nasdaq Composite (COMPX) simultaneously breaks 1467.
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.
IYR short (from April 24) –
shorted 81.15, new stop at 81.70, target of 79.80, unrealized points = + 0.20, unrealized P/L = + $18
WMH long (from April 23) –
bought 34.85 (avg.), stop at 32.50, target at 39.25, unrealized points = (0.17), unrealized P/L = ($18)
IEF short (1/2 position from April 9) –
shorted 85.87, new stop at 86.25, target of 84.00, unrealized points = (0.10), unrealized P/L = ($11)
We shorted IYR yesterday and are swinging it short for a few days. It was the first time we traded this ETF and it does indeed have a wide spread, so make sure you use a limit order when trading it. The index IYR follows is the Dow Jones Real Estate Index ($DJUSRE), so you may wish to track that index throughout the day rather than IYR itself.
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