Commentary:
Yesterday was an unusual day that equally confused both the bulls and
bears. Based on the fact that the S&P ended last week below its key
resistance of 1000, coupled with last week’s heavier volume selling and lighter
volume buying, odds were good that the market would have opened flat to slightly
lower yesterday morning. However, strong earnings reports from two of the
largest banks, Bank of America and Citigroup, both of whom reported before the
open, sparked a strong rally in the S&P futures. This resulted in a large
opening gap up in both the S&P and Nasdaq. Interestingly, the S&P opened
above the resistance of last week’s consolidation at 1005, while the Nasdaq also
opened above its resistance at 1300. Market internals, including volume, were
strong yesterday, which enabled the broad market to hold the opening gap and
subsequently establish an intraday uptrend that lasted until late morning.
Although we profited from a quick day trade in SPY (S&P 500 Index)
yesterday morning, we kept a tight trailing stop on the long position because we
knew the S&P had major overhead resistance from its prior highs that were
set in mid-June. This turned out to be a wise move because both the S&P and
Nasdaq futures peaked at their intraday highs around 11:15 am EST. After a small
price correction during the mid-day doldrums, the 20-period moving averages on
the 15 minute charts eventually rose up to meet the price of both the S&P
and Nasdaq futures. This caused the broad market to make an attempt at breaking
the prior intraday highs, but there was not enough momentum and both markets set
a lower high instead. From that point, things got a little whacky!
Remember when an errant sell order for a large futures contract caused a
huge and sudden selloff on the holiday-shortened session of July 3? Yesterday
was like deja vu because the S&P futures quickly dropped 8 points, from the
afternoon consolidation around 1010 down to new lows of the day at the 1002
level in less than five minutes! It marked the second time in less than two
weeks that a sharp and dramatic selloff was blamed on “errant sell orders.”
While it could be a genuine coincidence, it sure makes this trader and
newsletter writer think that something fishy has been going on. Either way, the
sudden drop caught the bulls off guard and caused a subsequent wave of real
selling during the final thirty minutes of trading. This, in turn, caused the
S&P futures to close the morning gap, while the Nasdaq nearly did the same
thing. While it is common for opening gap ups to become filled, it typically
happens shortly after the open. Yesterday was quite unusual in that the gap was
closed, but not until the final hour of trading. Nevertheless, the S&P, Dow,
and Nasdaq each closed positive yesterday, but each one gave back most of their
earlier intraday gains.
To illustrate yesterday’s action, I have
annotated a 15-minute chart of the S&P futures below. Notice how quickly the
selloff began when the futures broke below support of the 20-period moving
average during the final 90 minutes of trading. You will also see the long tail
on the candlestick that illustrates the “errant sell order” in the futures:
Looking at the daily charts, you will also notice that the S&P
futures formed a perfect double top from the June 17 highs yesterday, then
subsequently formed a bearish “shooting
star” candlestick formation. Take a look at the double top:
On an intraday basis, the Nasdaq futures actually traded above
its prior high, which was set on July 9, but also sold off to close below it.
The Dow, as we have been seeing recently, showed relative weakness and did not
have enough juice to make it up to its mid-June highs yesterday.
Going
into today, it is difficult to predict what will happen because the verdict is
still out on how the market will react to yesterday afternoon’s unexpected drop.
My gut feeling is that we will see weakness today due simply to the overhead
supply that was created by the bulls who were trapped during yesterday’s
selloff. But, the broad market could just as easily pop back into yesterday
afternoon’s range. So, you really need to be careful until the market settles in
and establishes a trend (if that happens at all today). Greenspan will be
presenting testimony to the Congress today and there are also many earnings
reports scheduled to be released as well. Be patient and let the market settle
before jumping in today. There will be plenty of time to catch the next “real”
move in the markets!
Today’s watch list:
EWJ – iShares Japan Fund
Long
Trigger = HALF POSITION
ONLY at market
Target = 8.70 (just below July 2002 high)
Stop = 7.55
(below July 2 low)
Notes = As you know, we have been stalking EWJ for a
long re-entry point since closing our position for 11% gain last week. We now
feel comfortable buying a partial position size today at market price. Remember,
we are looking to build a position SLOWLY by buying only HALF position initially
and we will then look to add another half position on a further price correction
or breakout. Remember that a half position of EWJ equals 400 shares, based on
the MTG Position
Sizing Model. Building a position slowly enables you to minimize risk, but
still participate in any upside movement.
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:
EWJ did not trigger yesterday, but
we will be entering partial position size today.
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