Last week ended with an uneventful, narrow-range day of trading that left each of the major indices with very small gains on Friday. Because of the holiday weekend, Friday’s total market volume in both the NYSE and Nasdaq was the lightest we have seen since April 21, over a month ago. While a sudden drop in market volume would normally provide us with a warning sign, it was not a big deal because decreased volume is always to be expected on the day preceding a three-day weekend. Aside from volume being light, the intraday trading ranges in each of the major indices were also quite narrow on Friday. SPY (S&P 500), DIA (Dow Jones Industrials), and QQQ (Nasdaq 100) each traded completely within their ranges of the previous day (May 22). The light volume, combined with the narrow intraday range, prompted us to remain in cash the entire day (with the exception of our open position in EWJ long).
As you know, each of the major indices broke support of their daily uptrend lines on May 19. Since that day, the indices have attempted to recover, but the prior support of the daily uptrend lines is now acting as resistance. In addition, the intraday highs of the last two trading days were equal to the lows of the prior week’s consolidation, which is a perfect example of how prior support levels become the new resistance levels once broken. I have also noticed that the S&P 500 Index has formed a bearish head and shoulders pattern over the past several weeks. The chart of SPY below illustrates both the new horizontal price resistance (circled in orange) and the head and shoulders pattern (circled in green):
In addition to the horizontal price resistance and head and shoulders pattern illustrated above, we can also look to Fibonacci to see how the market has retraced off the lows. Applying Fibonacci lines to SPY, you will see that the high of last week was exactly equal to a 0.618 retracement from the high of May 16 to the low of May 20 (which constitutes the entire range of the selloff). Take a look:
If SPY is not able to rally above the 0.618 resistance level in the coming days, it is likely to drop down to the May 20 lows by the end of this week. This would also represent a test of the neckline of the head and shoulders pattern. If the May 20 lows are subsequently broken, expect the completion of the head and shoulders pattern. This would constitute a move equal in range from the top of the head down to the neckline. In the case of SPY, that represents a move of approximately 3.5 points below the neckline, down to a price of around $88. Interestingly, this would put SPY near support of its 200-day moving average, as well as mid-way between the 0.382 and 0.50 Fibonacci support levels from the range of the two-month rally. The situation is basically the same for both DIA (Dow Jones Industrials), although QQQ (Nasdaq 100) is proportionately higher above its 200-day moving average. It’s too early to know for certain if the head and shoulders pattern will follow through to the downside, but I wanted to give you an early heads-up warning so you are prepared to sell short if the market rolls over here.
The hourly charts are looking bearish due to overhead price and Fibonacci resistance, as well as the head shoulders pattern discussed above. However, don’t forget that the daily and weekly charts still look relatively bullish. A rally above resistance of last week’s highs (set on May 22) would likely cause the major indices to quickly trade back up to the May 16 highs. But if the broad market can not break above last week’s highs, we are likely to head significantly lower due to all the resistance that has been created recently. As of right now, the major indices are in “no-man’s land,” meaning it could either way from here.
The market will probably show its hand soon, possibly as early as today, due to several key economic reports due to be released. Both Consumer Confidence and Home Sales reports are likely to drive the market upon their 10 am EST release later today. In the short-term, we remain neutral to slightly bearish until the market provides us with more confirmation one way or the other. If last week’s lows are broken, we will become more aggressively bearish (and short). On the other hand, if the market breaks above the 0.618 Fibo retracement level discussed earlier, we will need to be very careful on the short side and cover if last week’s highs are broken. Remember to TRADE WHAT YOU SEE, NOT WHAT YOU THINK!
Today’s watch list:
SPY – SPYDERS (S&P 500 Index Tracking Stock)
Trigger = HALF below 93.50, add HALF below 93.10 (half below hourly uptrend line, add half below May 22 low)
Target = 91.65 (low of last week)
Stop = 94.06 (above high of last week)
Notes = SPY short setup discussed in commentary above. Watching for break of hourly trendline support. Since there is a pre-market gap down today, remember to use the MTG Opening Gap Rules. This means that we will not short SPY immediately on the open if it gaps down below its trigger price. Instead, we will wait for a break of the 20-minute lows or a bounce into resistance.
DIA – DIAMONDS (Dow Jones Industrials Tracking Stock)
Trigger = HALF below 85.90, add HALF below 85.55 (half below hourly uptrend line, add half below May 22 low)
Target = 84.25 (low of last week)
Stop = 86.50 (above high of last week)
Notes = Similar setup to the SPY trade above. Watching for break of hourly trendline support. Since there is a pre-market gap down today, remember to use the MTG Opening Gap Rules. This means that we will not short SPY immediately on the open if it gaps down below its trigger price. Instead, we will wait for a break of the 20-minute lows or a bounce into resistance.
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 = + 0.10, unrealized P/L = + $68
There were no new trade entries on Friday, so we remain with our only position of EWJ long.
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