As anticipated, the major indices each closed higher yesterday and broke above resistance of their respective hourly downtrend lines that have been in place for the past week. Not surprisingly, the first half of the trading day was very choppy, with the Nasdaq regaining relative strength while the Dow and S&P lagged. This marked a reversal of last week’s sector rotation out of the Dow and back into the Nasdaq. The morning session was uneventful, but during the mid-day doldrums, news hit the wires that the U.S. either captured or killed Saddam Hussein’s sons. Although the technicals and market internals were bullish regardless, this news aided the major indices in breaking out a little faster. But, just as soon as the market became happy with that news, a totally different report hit the wires that the Eiffel Tower was on fire. Due to knee-jerk reaction with a fear of terrorism, this news caused the futures to sell off quickly and sharply. However, as terrorism became ruled out, the futures eventually rebounded, closing the day near the intraday highs in both the S&P and the Nasdaq. Overall, it was quite a news-driven day. While most “swing traders” were not affected much by the various news releases due to having looser stops, many intraday traders on both sides of the market were frustrated by both the “good” and “bad” news releases that came out without warning. Unfortunately, unexpected news occasionally hits the market when traders least expect it. But, the reality is that there is not much we can do about it. To ignore stop orders is totally foolish because you cannot risk a catastrophic loss when there are unknowns floating around. So, if you waited all day for the perfect trade setup and were stopped out when news hit yesterday, don’t worry about it because you did the right thing!
The most important technical indicator that occurred yesterday was that the total market volume was approximately 19% higher in both the NYSE and Nasdaq yesterday. Because the broad market closed higher than the previous day on higher volume, yesterday was an “accumulation day,” which is bullish and is the exact opposite of the bearish distribution patterns we saw last week. It’s also interesting to note that the S&P futures and SPY both bounced off support of the 50-day moving average for the second consecutive day yesterday. On the chart of SPY below, notice how yesterday’s low was equal to the 50-day MA:
Based on the bounce off the 50-day MA, you can see the importance of closely following the key moving averages we have been discussing over the past several days. The 20 and 50-day simple moving averages nearly always act as either support or resistance levels, which is why we have spent so much time looking at daily charts of the major indices over the past few days.
Yesterday’s closing prices of the major indices puts the broad market right in the middle of “the danger zone” of the past week. The “danger zone” is the term we use to describe the prices that represent the middle 40% of the range of an index or stock. In other words, the major indices have now retraced more than 1/3 of the selloff from last week and are now just hanging out in the middle of that range. Why do we call it the “danger zone?” It is simply because the buying or selling momentum can quickly and easily reverse when an index is in the middle of the range. To be either long or short is equally as risky when the market is in the “danger zone.” Therefore, caution is in order both for the bulls and bears as we enter the market today. Let’s let the market settle and be patient. Watch both the 20 and 50-day moving averages we have been discussing. Since it is possible we may be entering into an extended period of sideways consolidation for the summer, don’t assume many more strong trending days will occur for a while.
Today’s watch list:
PPH (Pharmaceutical HOLDR)
Trigger = above 78.20 (above yesterday’s high)
Target = 79.70 (resistance of prior high from July 18 and 50-day MA)
Stop = 77.50 (below yesterday’s close)
Notes = We have been stalking PPH for a reversal, but it did not trigger a few days ago. However, it now has formed a bullish reversal candlestick with a long tail on the daily chart. We are looking to buy PPH on a break above yesterday’s high.
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
- SMH long (half position from July 22) –
bought 31.50, new stop at 31.30, target of 32.90,
unrealized points = + 0.30, unrealized P/L = + $42
EWJ long (full position from July 15 – 17) –
bought 7.81 (avg.), stop at 7.35, target of 8.80,
unrealized points = (0.21), unrealized P/L = ($180)
We bought half position of SMH per yesterday’s Wagner Daily and are still long full position of EWJ. We plan to keep trailing a stop higher on SMH towards the target of 32.90.
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