Commentary:
The major indices began yesterday morning with an opening gap down below the previous day’s lows. The broad market spent the first two hours of trading in a narrow range, consolidating below the previous day’s closing prices. As we entered the mid-day doldrums, the major indices rallied and turned positive on the day. The Nasdaq clearly showed relative strength all morning to both the S&P and Dow. When both the S&P and Dow formed a double top at their previous day’s highs, the Nasdaq easily pierced through the previous day’s high and remained there for most of the afternoon session. The mid-day rally began fading into the afternoon trading session as both the S&P and Dow fell back down to just above their morning lows. Although the Nasdaq also saw weakness, it remained strong relative to the other indices and only retraced 50% of its intraday range. A minor buy program into the final thirty minutes of trading gave the major indices a lift that caused both the S&P and Dow to close in the middle of their intraday ranges, while the Nasdaq closed in the upper third of its intraday range. Both the S&P and Dow closed slightly negative on the day, but the Nasdaq Composite closed with a 0.5% gain.
Yesterday’s volume in both the Nasdaq and NYSE was only slightly higher than the previous day. For the Nasdaq, this is bullish because you want to see volume increase on the days when the index closes higher. However, both the S&P and Dow closed slightly lower on heavier volume than the previous day. Technically, higher volume with lower closing prices is bearish, but the increase in volume was very minor and the losses were too. So, I don’t think we can read too much into it at this point. Taking a look at breadth, declining volume marginally outpaced advancing volume in the NYSE by a ratio of 1.25 to 1. In the Nasdaq, advancers outpaced decliners by 2 to 1, thereby confirming yesterday’s move higher.
As you may recall, we mentioned in yesterday’s newsletter that we were beginning to see sector rotation and money flowing out of the S&P and Dow, both of which were showing relative strength during the previous week, and back into the Nasdaq. Yesterday’s market action confirmed our analysis because the Nasdaq closed positive while the S&P and Dow both closed in the red. Not surprisingly, the Biotechs were weak yesterday while the technology-related sectors, especially the Semiconductors, were strong. Since Biotechs have been so strong lately and the Semiconductors have lagged, this was a typical example of sector rotation that you would expect to see. Institutional money is always working in one particular sector or another, and if you can learn to spot which sectors are showing relative weakness and relative strength, you can increase your overall profitability while decreasing your risk. For example, we were simultaneously short DIA (Dow Jones Index) while long SMH (Semiconductor HOLDR) yesterday in the ETF Real-Time Room. While we broke even on the DIA short, which was showing relative weakness, we netted a 30 cent profit on SMH because we spotted the strength in the SOX index early in the day.
So which way does the market go today? To be honest with you, I have no idea! The major indices keep showing intraday weakness and act as if they are going to roll over, but buyers mysteriously appear into the final thirty minutes of trading to prop the market up. I can only say the same thing so many times before I sound like a broken record, but here goes again. . . Just about every technical signal indicates the major indices are overbought in the SHORT-TERM, but it does not matter because the market continues to hold onto its gains. While not going much higher over the past few days, the broad market is not going lower either. I guess you could say we are in a holding pattern, consolidating near the highs. Below is a daily chart of the S&P 500 Index. Notice the double “doji stars” at the top of the rally, which clearly indicate indecision:
The current consolidation at the highs should lead to another leg higher, but the narrow range “doji star” candlesticks show a tug-of-war is occurring right now. Since the past two days were narrow in range, there is a good chance that we will see a trend day today, but then again, remember that quadruple witching options expiration day is tomorrow. Therefore, it could be a bit choppy and narrow-range through the end of the week. Look for follow-through strength in the technology sectors such as Semiconductors, Hardware, and Internets. Possible areas of weakness include the Dow, Biotechs, and Financials. Use caution on whichever side of the market you trade today and keep your share size small until we see some confirmation in one direction or the other. We remain mostly in cash in order to be nimble and ready to take advantage of the market’s next major move.
Today’s watch list:
SMH – Semiconductor HOLDR
Long
Trigger = above 29.90 (above yesterday’s high)
Target = 30.82 (resistance of 61.8% Fibonacci retracement)
Stop = 29.40 (below yesterday’s close)
Notes = After perfectly bouncing off its daily trendline support two times this week, SMH (and Semiconductor Index) was one of the strongest sectors yesterday and we expect follow-through to the upside today, assuming the broad market is also strong. In the event of a gap up above the trigger price, remember to use the MTG Opening Gap Rules to prevent buying at the high of the day.
BBH – Biotech HOLDR
Short
Trigger = below 127.25 (above yesterday’s low)
Target = 123.05 (support of 20-day MA)
Stop = 129.50 (resistance of 50% Fibonacci retracement)
Notes = Yesterday was the first true day of weakness the Biotech index has seen in quite a while. If BBH breaks below yesterday’s lows, there is a good chance we will see more follow-through all the way down to the 20-day MA over the next several days. Note that BBH is a very volatile ETF! Make sure you properly adjust your position size based on the MTG Position Sizing Model in order to account for the volatility. A full position of BBH is only equal to 50% the position size of SPY. Also use the MTG Opening Gap Rules before shorting if BBH gaps down below its trigger price.
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
Model.
Closed Positions:
-
(none)
Open Positions:
-
(none)
Notes:
Yesterday’s long setup in SWH did not trigger. WMH, which was a long setup from the June 17 Wagner Daily, was very strong yesterday and is breaking out. We never took a position in WMH because we did not trust the broad-market for a new long entry, but congrats to those of you who took the play because it is doing well. We took a 1/2 position of OIH long overnight, which was called yesterday in the ETF Real-Time Room, but we do not “officially” have any open positions that were called in the Wagner Daily.
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
change.
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
updates.
SOH = Sit On Hands (Don’t Make Trades)
Closed P&L
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.
Unless
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