Yesterday’s intraday trading opportunities were minimal due to the narrow range of the major indices and there really isn’t much to say about yesterday’s intraday action. However, on a larger scale, the market provided us with several more hints that we will soon see at least a short-term price correction in the broad market. I wrote about some of the bearish clues that initially caught my attention in the May 13 Wagner Daily and yesterday provided us with even more confirmation based on a few technical factors.
First and most importantly, let’s discuss total market volume, which is always the most reliable technical indicator that exists (other than price). To review, I mentioned yesterday that the volume in the May 12 broad-based breakout was cause for concern. On an absolute basis, the volume was decent. However, the volume was significantly lighter than it was during the prior breakouts on both May 6 and April 23. Since the May 12 breakout put the Nasdaq Composite above resistance of its December 2 high and caused the S&P to break above its January 13 high, the volume should have been very strong to confirm such an important break of resistance. But, as I mentioned, it was lighter than during the previous breakouts, indicating the buyers may be drying up, at least in the short-term. Sure enough, we received more bearish volume signals yesterday because the May 13 total market volume was higher than May 12, but the market did NOT close higher. This is an extremely important observation that should not be overlooked because it tells us that the market was under distribution yesterday, which occurs when institutions sell into strength. This price action is usually recognized by strength in the morning, but weakness in the afternoon, with closing prices near the open, which is exactly what happened yesterday. To put it another way, the market is now “spinning it’s wheels” because volume is increasing, but the prices are not correspondingly going higher. This type of volume and price action usually leads to lower prices in subsequent days, so be alert and ready for a price correction in the broad market.
For those of you who use candlestick charts, you will also recognize yesterday as a possible reversal day based on the formation of a “doji star” in QQQ (Nasdaq-100) and a similar pattern in SPY (S&P 500). Not only did the market open and close at roughly the same price, but the major indices also formed a double top at the previous day’s highs, further providing us with another bearish signal. In fact, QQQ formed a triple top on the daily chart. Take a look:
We shorted QQQ twice yesterday morning with 1/2 size positions and were stopped out for small losses both times. However, we re-shorted QQQ in the afternoon after the double top formed and recovered the morning losses. We then covered half the position into the close and took the other half of the QQQ short position overnight. We will add to the QQQ short position on a break of yesterday’s lows, which would provide us with confirmation of the reversal. But, we will quickly cover QQQ if it breaks the triple top at yesterday’s high of 29.00.
As many of you already know, I try not to provide you with my opinions of what the market will do every day. Instead, I focus on providing you with just the facts through my interpretation of various facets of technical analysis. Therefore, I am neither bullish nor bearish about the market right now, but I do see several technical signals out there that cause me to think we will see a significant price correction, probably a 1/3 retracement off the highs of the two-month rally. It’s too early to tell and I could easily be wrong, but I want to give you a heads-up to what I am seeing so that you are alert and ready for a correction if it comes. If it doesn’t come, that’s fine too because we simply trade the market as we see it each and every day. Either direction is fine with me!
Today’s watch list:
We plan on adding to the open position in QQQ short IF it breaks below yesterday’s low of 28.54. However, let’s wait for more bearish confirmation before going after too many additional short setups. Likewise, I don’t see any long setups offering a good risk-reward ratio right now, but will send an e-mail alert if I spot one.
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
XLP long (1/2 position from May 8) –
bought 19.29, sold 19.55, points = + 0.26, net P/L = + $48
QQQ short (1/2 position from May 13) –
shorted 28.85, stop at 29.03, unrealized points = + 0.19, unrealized P/L = + $35
In addition to closing XLP, we also traded two round trips on QQQ yesterday for a total loss of 33 cents (both only half positions). We then shorted a full position of QQQ and gained 17 cents when we covered half the position and took the other half of the position overnight (see below). Complete P/L on the multiple QQQ trades will be reported in the weekly newsletter to avoid confusion here.
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