Believe it or not, the broad market finally corrected yesterday as the S&P lost 1.5%, the Dow lost 1.2%, and the Nasdaq Composite closed 1.7% lower. As discussed in yesterday’s newsletter, the “double doji” candlesticks on the S&P daily chart gave us a warning sign that enabled us to be fully prepared for the selloff. As such, we netted nearly 5 points of profit yesterday through shorting BBH, SPY, DIA, and a long position in OIH. Despite positive economic data that was released before the open, the major indices opened flat yesterday, indicating a change in sentiment versus the prior positive reactions the market had been experiencing even if negative economic data was released. This was our second clue that the market was going to be weak yesterday. Although the Nasdaq showed relative strength once again, the S&P and Dow began showing weakness immediately after the open. Because of the frequency of false breakdowns in the prior weeks, we waited for confirmation of an intraday downtrend before initiating any short positions. Specifically, we waited for the S&P futures to break below the previous day’s low, which would normally be a key support level. The break of the previous day’s low came quickly and from that point, the major indices never looked back. Unlike the pattern we have been seeing nearly every day, buyers were nowhere to be found during the final hour and the broad market closed on its intraday lows. If you have been paying attention to our commentary, yesterday’s selloff should not have come as a surprise to you and hopefully you were able to profit on the short side.
One thing I found interesting was how well the 200-period moving average acted as a key support level during yesterday’s downtrend. Out of all the moving averages we follow, the 200-period moving average is the most powerful and indices rarely break through a 200-MA without first bouncing off of it. While the 200-MA works the same regardless of which time interval you look at, the longer time intervals present even more support or resistance than a short interval. For example, a 200-day moving average is much more powerful than a 200-MA on a 5 minute chart. In the case of yesterday, we found it interesting that both SPY (S&P 500 Index) and DIA (Dow Jones Industrials) bounced off their respective 200-MAs on the 15 minute charts. Despite the selling pressure, the 200-MA provided support not once, but TWICE during the afternoon. Because we were aware of this key support level, we maintained small share size of our short positions until the 200-MA was finally broken later in the afternoon, at which point we shorted more shares. The 15-minute chart of DIA below illustrates how support was found both at the previous day’s low AND the 200-period MA:
More importantly than yesterday’s intraday selloff is the fact that the major indices broke below the lower channel support of their uptrend lines that have been in place since May 20. When a trendline that has been in place for a full month is finally broken, it is a very important signal to take profits on any long positions and consider either waiting for the market to regain support or initiate short positions. Below, I have illustrated this break of trendline support on each of the three major broad-based ETFs. Notice how QQQ (Nasdaq 100) just barely broke below its trendline because it has been showing the most relative strength of the three:
Remember that prior support levels become the new resistance levels once the support is broken. Therefore, the previous support of the trendlines illustrated above will now become the new resistance levels for each of the major indices. Any rally attempt up to these trendlines will present a low-risk shorting opportunity because you can set your stop just above the trendline. In the event that yesterday’s breakdown was false, you are keeping your risk minimal by waiting for the bounce to sell short and placing your stop just above your short entry point. If you calculate Fibonacci retracement levels from the May 20 lows to this week’s highs, you will see that each of the major indices still have a good distance to drop before they even come into support of their 38.2% retracement levels. For SPY, the 38.2% retracement is around 98.20. DIA support is at 90.25. QQQ support is just below 30.
Although the technicals look good for some more follow-through to the downside over the next several days, today could be very tricky due to “quadruple witching” options expiration. Today is the day in which options contracts for indexes, futures, stocks, and single stock futures all simultaneously expire. As most of you probably know, trading is usually quite volatile on witching days, so we are recommending extreme caution on both sides of the market. As you enter the afternoon trading session, cash is the safest play. Monday should present lower risk entries in new positions, after options expiration has passed. Have a great weekend everyone and thank you for your support over the past year.
Today’s watch list:
Due to the extreme volatility that is usually associated with triple (now quadruple) witching options expiration days, we are not planning on entering any new swing trades today. We feel the odds of getting whipped out of them with an erratic move is high. Therefore, we will look to re-assess on Monday.
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
BBH short (from June 19) –
shorted 127.52 (avg.), covered 125.58, net points = + 1.94, net P/L = + $191
SMH long (1/2 position from June 19) –
bought 29.88, sold 29.88, net points = + 0.00, net P/L = ($5)
Although BBH was intended to be a multi-day “swing trade,” it actually hit our price target yesterday, the same day it triggered. We also bought SMH per yesterday’s newsletter, but quickly bailed out for a scratch when we noticed weakness in the broad market. This prevented us from taking a loss on SMH. In addition, we had several profitable trades in SPY and DIA short, as well as OIH long, but they will be reported in the next Wagner Weekly, since they were called intraday in the ETF Real-Time Room. We are also short 1/4 position size of SPY and DIA from overnight, but they were also both called in the ETF Real-Time Room.
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