Commentary:
Despite a strong opening gap up that caused the major indices to open near the highs of the previous day, the distribution we observed on May 13 continued yesterday as institutions used the opening gap to sell into strength. Within the first 20 minutes of trading, the gap was filled. Ten minutes later, the major indices broke support of the previous day’s lows. The 15-minute chart of SPY (S&P 500) below illustrates how quickly the market sold off and trapped many bulls:
After engulfing the previous day’s entire trading range within the first thirty minutes, the market consolidated in a narrow trading range, near the lows of the day, for the next several hours. Buyers stepped into the close and caused the major indices to rally a bit before closing near the middle of their intraday trading ranges. Even though the market began the day with a strong move down, an intraday downtrend never developed. As such, most of the profits to be made yesterday were from a result of being short on the initial leg down, which we were. Beyond that, it was basically range-bound and choppy.
The opening gap yesterday caused SPY to set a double top at the highs of the previous day, but we found it particularly interesting that QQQ (Nasdaq-100) actually set a quadruple top. Obviously, 29.00 has become a key resistance level and pivot point on QQQ. If the Qs are unable to break above this pivot point, it could mark a short-term high. However, a break above the pivot point of 29.00 is equally bullish and will probably lead to significantly higher prices because many buy stops are undoubtedly just over that level. The daily chart of QQQ below illustrates the quadruple top:
As we first observed on May 13, total market volume once again indicated selling into strength yesterday. Volume was nearly the same as the previous day, but once again the market failed to close higher on the day. This means that the average volume of the past two days, in which the market has closed flat or lower, was significantly higher than the average volume of the prior three days in which the market rallied and broke out. If this trend continues to occur, the market will eventually exhaust the buyers to the point that the heavy selling volume will cause a sharp price correction.
Although we began to see signs of broad-market weakness during the past two days, it’s important to realize that the daily uptrend channels in the major indices are still intact. Therefore, it’s important not to be too aggressive on the short side until the lower channel support of the uptrend is broken. We have been short for the past two days, but have not been very aggressive with share size and are basically just “testing the waters.” If we receive more confirmation and follow-through on the bearish side, we will add to the short positions and enter new ones as well. But until the daily uptrend lines are broken, we have to remember that overused, but extremely accurate, Wall Street cliche — “The trend is your friend.” In the long-term, your profits are always greater and the risk is smaller is you simply trade what you see by trading in the direction of the general trend.
Today’s watch list:
The market remains in a transitional phase, in the middle of the range of the past several days. As such, we did not locate any clear trade setups that offer a positive risk-reward ratio going into today. However, we soon expect a decisive break either through the current resistance levels or below the lower channel of the uptrend line. At that point, we will begin to see clear trade setups develop 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.
Closed Positions:
-
QQQ short (full position from May 13 and 14) –
shorted 28.70 (avg.), covered 28.59 (avg.), points = + 0.11, net P/L = + $33
Open Positions:
-
QQQ short (1/2 position re-entry from May 14) –
shorted 28.55, stop at 28.85 (will mark the 5-minute high and use as the stop if it gaps open above our stop), unrealized points = (0.06), unrealized P/L = ($12)
Notes:
We added to the QQQ short yesterday, but covered it incrementally yesterday afternoon when the market began showing mild strength into the close. After re-assessing, we re-shorted QQQ (only 1/2 position) and took it overnight again. We also shorted SPY in the ETF Real-Time Room and that will be reported, as always, in the next weekly newsletter.
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
change.
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
updates.
SOH = Sit On Hands (Don’t Make Trades)
Closed P&L
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.
Unless
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