The broad market turned in quite an impressive performance yesterday as the major indices each broke out and closed at or near new highs of 2003. The participation of each of the major indices yesterday confirmed that breadth was positive and the S&P and Nasdaq futures both traded relatively in sync with each other. Most importantly, total market volume correspondingly increased yesterday, which is necessary in order to confirm the validity of the rally. Volume in the NYSE was 1.5 billion shares, the highest we have seen since May 6. Nasdaq volume was 1.93 billion shares, the highest since May 15. On a relative basis, yesterday’s volume was higher than its 5, 50, and 200-day simple moving averages in both the NYSE and Nasdaq. The ratio of advancing volume to declining volume, a key market internal, was also quite bullish. Advancing volume led declining volume by an impressive 8 to 1 ratio in the Nasdaq. The NYSE ratio was also bullish at 5 to 1. The positive breadth, increasing volume, and bullish market internals all confirmed that yesterday’s rally was probably for real.
Because of the numerous narrow-range days the broad market experienced last week, we knew that the market was likely to break out of its range going into yesterday morning. Since there were several mixed bullish and bearish technical signals, the question that remained unknown was which direction it was going to go. The most bearish signal was the break of the daily uptrend line in both the S&P and Dow, which occurred on May 19. We also knew there was a lot of overhead price resistance that remained from the week of May 12 – 16. In fact, that price resistance is what stopped the rally at the end of last week. Finally, we also knew that a bearish head and shoulders pattern had set up on the hourly charts and we were anticipating follow-through to the downside. All of these signals favored initiating trades on the short side of the market yesterday morning. As such, we shorted SPY, DIA, and QQQ after they broke below last week’s consolidation with the opening gap down. Although we had clear reasons to be short, the market quickly proved us wrong and we were promptly stopped out of our short positions. Fortunately, we scaled into the shorts with only partial position size and also set clearly defined stop orders just over last week’s highs. Both of these factors kept the losses reasonable. Without a clear exit plan, we would have lacked the discipline to stick to our stop prices and the losses would have become very large yesterday. We had solid reasons for being short and took a shot, but sometimes you’re simply on the wrong side of the market — that’s just part of trading. Personally, I never have a problem being wrong because I know that my stop orders will always keep me out of major trouble. It’s NOT admitting when you’re wrong that gets you into major trouble because the market has no tolerance for traders with big egos!
A lot of bullish technical indicators happened yesterday, so let’s take a quick look at each of the three major indices (SPY, QQQ, and DIA) to see where the next support/resistance levels are. We’ll begin by looking at the most broad-based of the three, which is SPY (S&P 500 Index).
SPY closed at 95.40 yesterday, which was the highest closing price SPY has seen since August 22, 2002. On an intraday basis, SPY traded higher than 95.40 on May 16 of this year, but SPY closed at 94.87 that day. Therefore, yesterday’s closing price of 95.40 was a new closing high of year-to-date. Because SPY closed higher than all the price resistance from May 12 – 16, there is now less overhead supply, which will increase the odds of SPY going higher from here. The key resistance level to watch is now the intraday high of December 2, 2002, which was 96.05. If SPY gets above 96.05, it should trade right up to its August 22 intraday high of 97.15. The weekly chart of SPY below illustrates these key resistance levels to watch:
DIA (Dow Jones Industrials Index) has been lagging SPY over the past several months, so it is still trading below both its December 2 high AND its high from January of 2003. Although DIA closed above its May 16 high yesterday, it did NOT set a new high for 2003. Here’s a weekly chart of DIA:
As you probably know by now, QQQ (Nasdaq 100 Index) has been the leader of the three broad-based indices, primarily due to incredible strength in the Biotech (BTK) sector during the past month. QQQ nearly set a new 52-week high yesterday by closing above its resistance for 2003 and its December 2002 resistance. The last time QQQ saw prices in the 29 range was June of 2002, eleven months ago. Here’s a week snapshot of QQQ:
So, there you have it. Looks like higher prices from here as long as yesterday’s highs remain intact. Use the weekly charts above to mark key pivotal resistance points in each of the major indices. Trailing stops should work well as long as we remain in a trending market.
Today’s watch list:
EWJ – iShares Japan Fund
Trigger = above 6.91 (above prior high)
Target = 7.25 (high of 2003)
Stop = 6.55 (same as existing stop)
Notes = We already have a full position in EWJ from May 22. But, if EWJ trades above its prior high of 6.91, we will be adding to the position so that we will have a double size position. Adding to the winners is a key to long-term profitability!
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
TLT short (1/2 position from May 27) –
shorted 95.10, covered 94.62, points = + 0.48, net P/L = + $45
SPY short (1/2 position from May 27) –
shorted 93.28, covered 94.08, points = (0.80), net P/L = ($83)
DIA short (1/2 position from May 27) –
shorted 85.71, covered 86.50, points = (0.79), net P/L = ($82)
TLT short (1/2 position from May 27) –
shorted 95.10, new stop at 95.10, target of 93.05, unrealized points = + 0.98, unrealized P/L = + $96
IEF short (from May 27) –
shorted 89.03, new stop at 89.15, target of 88.05, unrealized points = + 0.16, unrealized P/L = + $29
EWJ long (from May 22) –
bought 6.70 (avg.), stop at 6.55, target of 7.25, unrealized points = + 0.08, unrealized P/L = + $58
We did not get long the broad-based ETFs yesterday, but we shorted the bond ETFs, which is a bullish move. We shorted a full position of TLT yesterday, covered half intraday, and took the remaining half overnight. However, we took the full position of IEF short overnight. We also remain long EWJ from May 22. SPY and DIA shorts, which were stopped out yesterday, were both entered with only 1/2 position size.
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