Fueled by a better than expected Consumer Confidence report, the major indices initially broke through their key weekly resistance levels yesterday morning, but the euphoria quickly faded, sending the markets into a whippy and indecisive range that lasted the rest of the day. The 5-minute intraday chart of the S&P and Nasdaq futures below pretty much sums it up. This is also the primary overlay chart we use throughout each trading day to look for divergence between the S&P and Nasdaq futures:
As you can see, yesterday’s market action resembled a tug-of-war competition between the bulls and bears. One thing that helps to explain the volatility is the fact that just about every technical analyst and trader in the world was watching the same levels we have been watching, which is the break of the weekly downtrend lines of resistance on both the S&P 500 Index (SPY) and Dow Jones Industrials (DIA) (click here to review the weekly charts in yesterday’s newsletter). Therefore, when both indexes rallied above resistance of their weekly downtrend lines that have been in place for several years, it undoubtedly triggered a ton of buy stops both to cover shorts and get long the market. This is what caused the parabolic spike in the futures. However, there were apparently an equal number of traders who were waiting for that spike to sell into it, mixed in with some program selling. The combination of events caused a powerful break of resistance that quickly failed, sending the markets into a state of indecision that left many traders, including myself, scratching their heads and wondering what would happen next. We went long several of the broad-based ETFs when the S&P and Dow broke out yesterday and took profits on a third of our position size near the top of the rally. However, we were obviously stopped out when the breakout failed. The subsequent consolidation at the lows pointed to a probable selloff in the afternoon session, but the major indices were still sitting on price support from the previous day. Because of the mixed signals, we figured the best play was to sit on our hands and do nothing for the rest of the day, which is what we did (with the exception of a low-risk MDY short attempt in which we netted a nickel).
Yesterday’s failed breakout above the weekly trendline resistance was certainly a bearish signal that we need to be aware of. A multi-year downtrend is certainly difficult to break and resistance of this downtrend line could easily mark the top of this rally. Each of the major indices also formed a “doji star” candlestick formation, which indicates indecision that often, but not always, signals a reversal of the current trend. Many market tops are formed in the same manner as the type of action we saw yesterday morning, so we are certainly a bit less optimistic about the continuation of the rally as we head into the remainder of the week. However, there are several bullish signals that are providing us with conflicting signals regarding the short-term direction of the markets. Here they are:
- Head and shoulders bottom pattern has formed on the hourly charts – If you look at an hourly chart of any of the major indices, you will see that yesterday loosely formed the right shoulder of a “head and shoulders bottom” chart formation that began forming five days ago. This bullish chart formation would confirm itself if the S&P futures rallies back above the neckline, which is at the 920 area (92.50 on SPY). I have annotated an hourly line chart of SPY to show you this formation (DIA and QQQ look the same way too):
- Nasdaq Composite (COMPX) closed above 1467 – As we have been discussing, the 1467 level in the Nasdaq Composite is a key pivot point we have been watching because it marked the prior resistance from the January high and is also the same level where the Nasdaq formed a double top last week. However, the Nasdaq closed at 1471 yesterday, squeaking by that prior resistance level of 1467. This means the Nasdaq Composite closed at a new year-to-date high and could set the tone for follow-through in the S&P and Dow as well.
- S&P 500 and Dow Jones Industrials still at the highs – Despite yesterday’s volatile session, both SPY (S&P 500) and DIA (Dow Jones Industrials) closed higher than the previous day. While yesterday looked like indecision on the surface, it could just as easily have been consolidation, also known as a correction by time, which would build a more solid base to launch the market through its weekly resistance levels during the next few days. It’s often easy to miss the bigger picture of what is happening when you trade the markets on an intraday basis, but it is crucial to always look at the bigger picture first.
With all these mixed signals, what is the best way to handle the market over the next few days? I would personally approach the market with the assumption that the major indices are headed sideways to higher UNTIL the uptrend line on the daily charts is broken. At that point, you would shift your bias more to the downside. Though we were bullish headed into yesterday, we are now mostly neutral on the market in the short-term based on yesterday’s indecision. I think you need to be equally cautious on both sides of the market and remain mostly in cash until the market clearly presents any low-risk setups. If SPY and DIA rally above their pivot points (92.50 for SPY and 85.50 for DIA), we will cautiously re-enter the market on the long side. Likewise, we will do the same if QQQ trades back above its pivot point at the 27.80 – 27.90 area. However, we remain equally ready to sell short if the major indices take out support of yesterday’s consolidation level. Yesterday was a great example of the importance of trading what you see, not what you think. So, I’ll say it again. . . TRADE WHAT YOU SEE, NOT WHAT YOU THINK.
Today’s watch list:
DIA – DIAMONDS (Dow Jones Industrial Average Tracking Stock)
Trigger = above $85.50 (above weekly downtrend line and 50-week MA)
Target = $88.85 (high of year-to-date, set in January)
Stop = $84.90 (below breakout point)
Notes = The breakout in the Dow failed yesterday, but we will re-enter if it trades back above its pivot point at 85.50 area again. The risk/reward of the potential upside move in DIA justifies a re-entry if it triggers again.
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 (from April 29) –
bought 92.38, sold 92.05 (avg.), points = (0.33), net P/L = ($72)
DIA long (from April 29) –
bought 85.50, sold 85.12 (avg.), points = (0.38), net P/L = ($80)
WMH long (from April 23) –
bought 34.85 (avg.), stop RAISED to 33.50, target at 39.25, unrealized points = + 0.30, unrealized P/L = + $27
We were stopped out of our SPY and DIA long entries yesterday when the reversal hit. However, we locked in a profit of over 2 points on the SPY and QQQ shares we were long from over the weekend. Since those trades were initially called in the ETF Real-Time Room, they are not reported above, but will be reported in the next weekly newsletter. In addition to WMH above, we currently have open positions in TTH and EWJ, both of which were called in the ETF Real-Time Room. Watch EWJ today!
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