The S&P and Dow both began yesterday’s trading session with a significant opening gap down below the consolidation level of the past week, as well as the daily uptrend line that had been intact since March 12. The Nasdaq also gapped down a bit, but once again showed relative strength to the S&P and Dow. This key break of support by the major indices became even uglier after two economic reports (ISM Index and Construction Spending) both missed estimates, causing the broad market to sharply sell off in a matter of minutes. However, the selling was short-lived and the major indices bottomed out and found support just above their respective 50-day moving averages. Within the first 45 minutes of trading, the S&P, Dow, and Nasdaq each marked what became their intraday lows and began a reversal that eventually turned into a sharp rally later in the afternoon. By 1:15 pm EST, the market’s reversal caused each of the major indices to rally all the way back up to their opening prices, which also corresponded to the highs of the day. After consolidating at the morning highs for one hour, big buy programs kicked in and powered the broad market back up through resistance of last week’s consolidation, enabling each of the major indices to close at their respective highs of the previous day (June 30). Though the selling volume in the morning was strong, the buying volume in the afternoon was even stronger. Interestingly, the TICK reading actually spiked as high as + 1300 several times in the afternoon, confirming the strength of the buying. It was certainly a wild day, but we traded it well by profiting on the short side in the morning, then reversing and going long upon seeing confirmation of the buy program in the afternoon. In order to clearly illustrate what occurred yesterday, I have annotated an intraday chart of SPY (S&P 500) below:
Several fascinating things occurred on various chart intervals yesterday. For one, yesterday morning’s selloff in the S&P stopped EXACTLY at the 50% Fibonacci retracement level from the most recent rally that began on May 20 and peaked on June 17. The daily chart of the S&P futures below illustrates this phenomenon:
Although I have only shown you the S&P, the selloff in both the Nasdaq and Dow also stopped at the 50% retracement level as well. While on the subject of Fibonacci, let’s discuss where yesterday afternoon’s rally stopped. To project the Fibonacci resistance levels for yesterday afternoon’s rally, you would simply measure the distance of the selloff from the high of the recent rally (June 17) to the low of the recent selloff (July 1). In doing so, you will notice that yesterday’s rally in the S&P stopped at the 38.2% Fibonacci retracement level. Take a look:
Pretty cool, isn’t it? In case you have been wondering why I frequently discuss Fibo retracement levels in my daily newsletter, you’ve just seen two clear examples of the power of Fibonacci! If you can train yourself to constantly be looking for the next Fibonacci retracement levels, you will be able to predict key support and resistance levels with amazing accuracy, especially with the broad-market indexes.
Going into today, use the Fibonacci retracement levels from the June 18 high to the July 1 low in order to predict intraday resistance and support levels for your day trades. To save you some time, here are the 38.2%, 50%, and 61.8% Fibonacci retracement levels for the three major broad-based ETFs:
DIA – 90.78, 91.40, 92.00
SPY – 98.65 (yesterday’s high), 99.30, 100.00
QQQ – 30.01, 30.25, 30.48
I recommend you write down these levels and keep them in front of you today. If you are long, those are good points to watch for resistance and consider taking profits. If you are not already long, you could also use and pullback to these levels as support to enter long positions. Also, remember that both SPY and DIA have resistance of their 20-day moving averages overhead, which will be a real test of resistance. The 20-day MA for DIA is at 91.36 and is at 99.37 for SPY. QQQ, on the other hand, actually closed above its 20-day MA, which is at 30.25. Finally, each of the major indices broke above resistance of their hourly downtrend lines from the June 18 highs yesterday. This trendline, which formerly was acting as resistance, should now provide support for the major indices. The hourly chart below illustrates the break of resistance for SPY:
Most likely, yesterday’s low marked the low of the downtrend that began in mid-June. When an index breaks support of a key trendline (as the major indices did yesterday), then reverses and breaks through the trendline resistance on strong volume, it is referred to as a “reversal day.” The type of price action we saw yesterday is powerful and usually follows-through over the next several days. Therefore, odds are pretty good that the broad market either continues the uptrend that began yesterday afternoon OR consolidates and trades sideways today. Although anything can happen, I would be surprised if the major indices closed much lower today, based on yesterday’s bullish reversal day. Now the big question becomes whether or not the market will have enough strength to break through the mid-June highs or if it forms a double-top instead. But we probably don’t have to worry about either scenario until after the holiday is over this week. By the way, how about that EWJ? The Nikkei closed up more than 300 points (3%) overnight, which should cause another nice gap in EWJ today. Looks like we bought just in time to catch a nice move!
>>Note that the U.S. equities markets close at 1:00 pm EST tomorrow and are closed all day Friday for Independence Day holiday.<<
Today’s watch list:
Due to the opening gap, we are not listing any specific entry prices for new trade entries in the newsletter. However, if the market stabilizes and consolidates, we will probably enter long positions as swing trades in the broad-based ETFs such as QQQ, SPY, and DIA. If we do, we will be sure to send an e-mail update informing you of our plan. For now, we will sit with EWJ long and the SPY position from overnight (called yesterday in the ETF Real-Time Room)
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
DIA short (1/2 position from July 1) –
shorted 89.08, covered 89.00, points = + 0.08, net P/L = + $5
WMH long (from June 24) –
bought 39.40, sold 38.92, points = (0.48), net P/L = ($51)
EWJ long (from June 30) –
bought 7.30, stop at 6.80, target at 8.95, unrealized points = + 0.16, unrealized P/L = + $118
Some of you may have caught the entire 80 cent gain in DIA short per yesterday’s trigger prices because DIA dropped to within 5 cents of our price target yesterday morning. However, we did not want to short DIA before the ISM number was released, but then DIA dropped so fast that we did not have time to get short. Instead, we waited for a bounce into resistance and shorted, but the market never went much lower. So, we basically scratched DIA even though some of you probably caught the whole gain. We also were stopped out of WMH yesterday morning for a small loss, but EWJ is rocking! We also took SPY overnight, per a call in the ETF Real-Time Room, and we have an unrealized gain of nearly 1.5 points since yesterday’s entry.
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