After beginning the day with a relatively flat opening, the major indices ripped higher yesterday immediately upon the release of the ISM Services report, which was released at 10 am EST. The report easily surpassed expectations, indicating a sharp increase in the service sector, which in turn supports the speculation that an economic recovery was on track in the month of May. Within thirty minutes of the release of the ISM Services report, the major indices busted through resistance of their respective June 2 highs that we discussed in yesterday’s newsletter. After breaking the June 2 highs, the market entered into a narrow, sideways consolidation pattern and remained there for the next five hours. Going into the final thirty minutes of trading, the major indices rallied again and broke out above the highs of the consolidation period, closing the session near their highest levels of the day. A small amount of selling hit the markets within the final ten minutes of trading due to an e-mail that a Microsoft employee sent out regarding “significant challenges” in the near future, but MSFT and the broad market basically brushed it off.
Without a doubt, yesterday’s market action was incredibly bullish! No matter which side of the market you are on, there is no denying that some very bullish technical signals occurred yesterday. To begin with, volume remained very strong yesterday, especially in the Nasdaq. Yesterday’s total volume in the Nasdaq actually exceeded the June 2 level of 2.52 billion shares. Since June 2 was a distribution day, as defined by higher volume than the previous day with a lower closing price, the fact that yesterday’s volume surpassed this level is very important because it indicates there are still enough institutional buyers out there to absorb any remaining sellers. The high volume numbers we have seen during the past week just don’t happen without institutional support, so it is a key point that the most recent rally was supported by institutions, not just the retail public. Advancing volume also outpaced declining volume by nearly 6 to 1 in the NYSE and nearly 3 to 1 in the Nasdaq, further confirming the legitimacy of the rally.
Another key point is that both the Nasdaq Composite and the Nasdaq-100 Index (including QQQ) closed at new 52-week highs yesterday. This is important because indexes and stocks trading at 52-week highs typically go higher due to the lack of overhead price resistance. In addition to the Nasdaq itself, over eight hundred new 52-week highs on individual stocks were set yesterday (between the NYSE and the Nasdaq), while there were only seven new 52-week lows. This confirms the breadth of the rally by indicating that the gains were not just limited to one or two market sectors. Neither the Dow Jones Industrial Average nor the S&P 500 Index set new 52-week highs. However, the S&P set an 11-month high, while the Dow saw its highest closing price since August of 2002 and finally closed above the elusive 9,000 level.
With all this bullish action, you’re probably thinking we must have made a killing on the long side yesterday, right? Well, not exactly. Although we have profited handsomely from the long side of the market since the rally began on March 12, we have not participated on the long side of the market’s most recent move. While the media would have you believe that everyone is making tons of money now because the market is rallying, the reality is that many professional traders are short the market due to the overbought daily charts, many of which are showing incredible parabolic moves that are rarely sustainable. As a professional trader, I don’t get caught up in media hype or become swayed by other people’s emphatic opinions. Instead, I simply focus on what the charts are telling me and act in a manner that is most likely to put the odds of a profitable trade in my favor. Does this mean I am always right? Certainly not! Although I could not justify a positive risk/reward ratio for entering new long positions over the past few days, the market has simply proven me wrong. It’s not the first time and it definitely will not be the last time. I have absolutely no problem admitting I am wrong and I’m not even upset that I did not remain long until the top of the move. Being wrong does not hurt your profits in the long-term; however, the thing that has destroyed thousands of traders is NOT admitting when you are wrong and refusing to take your loss, even when the market proves your opinion wrong. Did I get stopped out of a few shorts over the past few days? Absolutely, but I was extremely disciplined, stuck to the plan, and took my lumps like a man. As long as I remain disciplined and always take the stops, I’ll be around in this game for a long, long time. But what happens if you cling hopelessly to an opinion even after the market proves you are wrong? Well, let’s just say you probably won’t last longer than one year in this business until that one rogue trade that “can’t go any higher/lower” knocks you out of the business. Just a little trading psychology for you to think about this week.
We mentioned yesterday that overbought conditions can remain overbought for quite some time and that is exactly what we are seeing right now. Yesterday’s breakout above key resistance levels means the market looks great over the intermediate-term, the next six months or so. However, the short-term daily charts continue pushing up against the upper channel of their daily uptrend lines, as they have done for the past several days. So how do you handle the rest of the week? If you’re long, you’re probably pretty happy and you should be! In that case, you probably should continue sitting on your long positions, using trailing stops to lock in gains along the way to protect against the inevitable correction. If you’re short, you either need to define your maximum risk tolerance and stick to your plan or simply cover your shorts and wait for more confirmation of a correction before re-entering any short positions. If you’re in cash right now, the smartest thing to do is either trade the intraday moves using tight stops or just sit tight on the sidelines, waiting for a price correction. If you missed the most recent move, it certainly does not make sense to chase the rally and enter new multi-day positions at these levels. Do we plan on getting long the market again? Absolutely, the weekly charts look great now and the market is likely to continue building on recent gains, but we first need to wait until we see at least some type of correction. Ideally, we would like to see a retracement down to the lower channel support of the daily uptrend lines. Doing so will provide us with a much more positive risk/reward ratio in order to catch the next move up.
Just to give you a quick visual reference, I’ve annotated a few daily charts of the major broad-based ETFs. You can use these charts as a reference for determining entry and exit points in entering new positions. Note how well the market has been obeying these primary trend channels since the rally began in March:
After looking at the charts above, do you now see why we are stepping away from the long side for now? The risk/reward of entering new long positions just cannot be justified, even if the market does go higher from here. But, after we see an invetible correction down to the lower channels of the trendline (either through a price retracement or time), we are ready to get long. Jobless data due out at 8:30 am today could affect the market’s direction. Be careful out there and remember to always use stops!
Today’s watch list:
MDY – S&P Mid-Cap SPYDER
Trigger = below 87.90 (below yesterday afternoon’s consolidation)
Target = 85.70 (38.2% Fibo retracement)
Stop = 88.60 (above yesterday’s close)
Notes = We’re not forcing this short trade to happen because our trigger price is well below support of yesterday afternoon. However, we want to be ready in the event of a price correction today, which could easily happen.
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
IWM short (from June 3) –
shorted 88.04, covered at 89.60, points = (1.56), net P/L = ($159)
EWJ long (DOUBLE position size from May 22 and June 2) –
bought 6.83 (avg.), NEW stop at 6.75, target of 7.70, unrealized points = + 0.15, unrealized P/L = + $216
HHH short (from June 3) –
shorted 36.65, NEW stop at 37.90, target of 34.80, unrealized points = (1.04), unrealized P/L = ($208)
We raised the stop on EWJ (which has been working out great for us). We were stopped out of IWM, but may re-enter when/if conditions warrant. Will send e-mail alert if we do. Still short HHH with slightly adjusted stop.
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