The major indices closed slightly higher as they spent all of yesterday trading in a narrow range, consolidating near the previous day’s highs. Because markets typically don’t go straight up or straight down, yesterday’s sideways action was simply a correction by time that allowed the major indices to “catch their breath” after making such a large move on Tuesday. Consolidation days do not provide many intraday trading opportunities with good risk/reward ratios. But, the good news is that the sideways trading action builds a more solid base for higher prices than if the market simply rallied right on the heels of a strong rally on the previous day.
Although a very short-term 5-minute chart might have caused you to think that yesterday was really choppy, a slightly longer term hourly chart smooths out the bumps and clearly shows that yesterday was simply a consolidation day near the previous day’s highs. 5-minute charts, which many day traders use, show too much “noise” and that is the reason why we rarely use them. Instead, we rely primarily on 15-minute and hourly charts. Below is both a 5-minute and hourly chart of SPY to illustrate my point:
Because yesterday’s range bound action was not conducive to intraday trading, we did not enter any new trades. Instead, we focused on watching the key support and resistance levels of the broad market in order to assess the health of yesterday’s market action. One key support level for the S&P futures was 949.50, which was the prior high of 2003. Since the S&P rallied above that level on May 27, it was important that it did not drop back down below it yesterday, which it did not. In fact, yesterday’s low in the S&P futures was 949.60. That’s a prime example of how prior resistance becomes the new support once the resistance level is broken. The daily chart of the S&P futures below illustrates this concept. Notice how yesterday’s low was equal to the May 16 high:
That horizontal support level of 949.50 on the S&P futures equates to a price of 95.50 on SPY. So, if you are long SPY going into today, you may consider using the 95.45 area as your stop because a break of that level would technically be bearish. On the upside, remember that 96.05 is a resistance level (high of December 2) and 97.15 is the next resistance level beyond that (high of Aug. 22).
DIA and QQQ both traded in sync with SPY yesterday and both closed above their prior highs of the year (from the week of May 12 – 16). This is important in confirming the breadth of the recent rally. For DIA, the key support level to watch is the 87.70 area, which is the prior high of May 15. Next resistance on DIA is 88.88, then at 90.66. For QQQ, the key support level is at the 29.00 area with not much near-term resistance overhead. You may wish to reference yesterday’s Wagner Daily for an illustrated snapshot of the resistance levels for SPY, DIA, and QQQ.
Now that you know the key support and resistance levels going into today, your plan should be relatively simple. If you are already long the broad-based ETFs, consider setting your stops just below the support levels mentioned above. If you are flat the broad market (as we are), then simply wait for a break of resistance to go long, then set your stop just below the breakout point. Since the markets are currently in a range expansion mode, it is unlikely that today will be another consolidation day, but if it is, we will be patient once again and wait for the market to show its next move before acting. That will minimize the odds of being on the wrong side of the market and getting chopped up. Being bored and in cash is better than having the adrenaline going but losing money. Remember that the goal of trading is to generate consistent profits, NOT entertainment. Finally, remember to TRADE WHAT YOU SEE, NOT WHAT YOU THINK.
Today’s watch list:
SPY – SPYDERS (S&P 500 Index Tracking Stock)
Trigger = above 96.13 (above Dec. 2 high)
Target = 97.15 (high of Aug. 22)
Stop = 95.80 (just below the breakout point)
Notes = Looking to buy SPY above the December 2 high, but will keep a tight stop at 95.80 in case the breakout fails. This enables us to have a good risk/reward ratio on the trade.
EWJ – iShares Japan Fund
Trigger = above 6.95 (above May 14 high and 200-day MA)
Target = 7.25 (high of 2003)
Stop = 6.55 (same as existing stop)
Notes = This was a setup from yesterday that did not trigger, but we want to keep it on our watchlist again today. 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 93.77, points = + 1.33, net P/L = + $130
IEF short (from May 27) –
shorted 89.03, covered 88.60, points = + 0.43, net P/L = + $80
EWJ long (from May 22) –
bought 6.70 (avg.), stop at 6.55, target of 7.25, unrealized points = + 0.02, unrealized P/L = + $4
We used a trailing stop to close the remaining shares of the TLT and IEF shorts, both of which were profitable trades. Only open position now, as you can see, is 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