After forming an ascending triangle chart pattern the previous day, SPY
(S&P 500) gapped up above the May 21 high and subsequently rallied to
perfectly complete the predicted move of the ascending triangle. Technical
analysis states that the predicted rally of an index after it breaks the high of
an ascending triangle is equal to the height of the triangle at its highest
point. The chart below illustrates the ascending triangle from May 21 and
yesterday’s follow-through to the upside. I have also removed all the moving
averages and volume bars to enable you to more clearly see the chart pattern:
Although you cannot see it from looking at a 15-minute chart,
the breakout above the resistance of 93.00 in SPY initially lacked conviction
due to the overhead supply from the break of trendline support earlier in the
week. In the ETF
Real-Time Room, we bought the breakout in SPY (and DIA) yesterday, but sold
them for a scratch before they made their moves a few minutes later. Sometimes
that happens and it’s just part of trading. But remember that it’s crucial to
always make capital preservation your top priority, which means you sometimes
need to bail out of a position if you are unsure of a particular trade. What
happens thereafter is irrelevant.
Yesterday was also a good day to
illustrate the power of the 200-period moving average. Of all the moving
averages we follow, the 200-period moving average is the most powerful because
it is based on a relatively long time frame. It is so powerful that indices will
rarely break through overhead resistance of a 200-MA on their first attempt, nor
will an index typically drop below a 200-MA without first bouncing off support.
The 200-period moving average is powerful on all charting time frames, but it
becomes more powerful as the time frame of a chart becomes longer. In the case
of yesterday, SPY, DIA, and QQQ each ran into overhead resistance of their
200-MAs on the 15 minute charts. Not surprisingly, each of the three major
indices failed to break through the 200-MA on the first attempt. The 15-minute
chart of SPY below illustrates this. Notice how the SPY breakout lacked
conviction even after it finally broke through the 200-MA on its 8th attempt.
This was due to overhead resistance from the lows of last week (not
I also found it interesting that QQQ (Nasdaq 100) closed exactly at its
20-day moving average yesterday. So, watch that 28.09 level to act as a pivot
point in QQQ going into today.
Do you remember that four-day period of
sideways consolidation we saw in the major indices last week? Well, the low of
that consolidation period is the point at which the rally in the major indices
stopped yesterday. As you know, prior support levels always become the new
resistance levels. The hourly chart of DIA (Dow Jones Industrials) illustrates
how the lows of last week acted as resistance yesterday:
The overhead resistance of last week means that the market will have a
difficult time breaking yesterday’s highs unless volume is strong enough to
overcome the overhead supply that was created when the bulls became trapped last
week. But, high volume is not likely to happen today because the markets are
closed on Monday for Memorial Day holiday. This means that volume is likely to
be light today because many traders begin their Memorial Day weekend a day
early. When volume is light, we know that trends are susceptible to reversing
easily and trading conditions are usually choppy. Therefore, we recommend
caution on BOTH sides of the market today, but have a relatively neutral to
slightly negative bias on the broad market today. However, we are bullish on the
intermediate outlook of Japan and the Nikkei, as evidenced by yesterday’s long
entry in EWJ (iShares Japan Fund). We expect to see divergence between the Asian
and U.S. markets in the coming weeks, but that’s a whole different story.
Because of the holiday, there will be no publication of The Wagner
Daily on Monday, but regular publication will resume on Tuesday, May 27.
Have a fun and safe holiday everyone.
Today’s watch list:
There are not
any new setups going into today due to the anticipated light volume of the
pre-holiday trading session. As of now, we will only be long EWJ over the
weekend. However, if we spot any indices or sectors that are acting well and we
enter positions in today, we will send you an 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
- EWJ long (from May 22) –
bought 6.70 (avg.), stop at 6.55, target of
7.15, unrealized points = + 0.03, unrealized P/L = + $13
Per yesterday’s newsletter, we bought a full position of EWJ for a
swing trade. Remember that position size of EWJ is four times the standard SPY
position size (based on the MTG Position Sizing
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