Despite a selloff in the morning and a recovery in the afternoon, yesterday was the second consecutive “inside” day in the S&P. This means that, rather than breaking out to new highs or selling off to new lows, the S&P traded “inside” of the previous day’s range for the entire day. The Nasdaq Composite, on the other hand, showed relative strength once again and closed just above the previous day’s high. Like the Nasdaq, the Dow also closed slightly higher than the previous day. Overall, it was an uneventful day with little changes in volume as well. While the NYSE volume came in slightly lower than the previous day, the Nasdaq volume was a bit higher. As we have been emphasizing over the past few days, it is important not to overtrade as long as the broad market remains in this current holding pattern. Instead, it’s a good idea to either remain on the sidelines in cash OR focus on trading those sectors with relative strength or weakness, as we did when buying PPH (Pharmaceutical HOLDR) yesterday.
SPY (S&P 500 Index) has been trading in an almost perfect range for the past three days, trapped between support of the 50-day moving average below and the 20-day moving average above. These two closely-monitored moving averages are slowly coming together to squeeze the price of the S&P, meaning that we are likely to see a break out of the range very soon. Based on the bullish volume patterns this week (one accumulation day and lighter volume selling days) and the fact that the S&P keeps closing near the highs of the range, it seems likely that the S&P will attempt to break higher out of the range within the next day or two. Take a look at the daily chart of SPY, which illustrates the current contraction between the two moving averages:
We bought SPY in the ETF Real-Time Room yesterday and took it overnight in anticipation of a gap up above the range today. However, even if you are not long the broad market coming into today, a low-risk play can still be found through setting a buy stop to get long just above the high of the past three days in SPY and then setting a stop order just below the breakout point if your buy stop triggers. Then, you would simply trail a stop higher in anticipation of the S&P eventually making another test of the prior highs in the 102 area. QQQ (Nasdaq 100 Index) would also be a potential long play today because it has formed a perfect inverse head and shoulders pattern over the past several days, which you can see clearly on an hourly chart. This bullish pattern should lead to higher prices over the next several days if QQQ can sustain itself above yesterday’s high.
Going into today, the plan is pretty simple. Watch for breakouts of the consolidation of the past few days, set your buy stops, and trail your protective stops higher. If, however, the futures remain in the consolidation range for yet another day, just be patient and continue waiting for the right setup to come along. Let the market come to you and present a clear opportunity rather than forcing the trades to happen. But, be prepared because a breakout is likely to happen soon. From that point, look for a volume increase to confirm the breakout.
Today’s watch list:
SPY – SPYDERS (S&P 500 Index Tracking Stock)
Trigger = above 99.60 (above the three-day high)
Target = 101.90 (resistance of prior high)
Stop = 98.75 (below yesterday’s close)
Notes = Trade setup described in detail in commentary above. However, since the futures are now gapping up above the trigger price, remember to use the MTG Opening Gap Rules, which mandate waiting for a break of the first 20-minute’s high before buying SPY. If, however, SPY sets a new high after 20-minutes, that will be the new buy price and the stop will correspondingly be trailed higher.
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, sold 31.70,
points = + 0.20, net P/L = + $26
- PPH long (from July 23) –
bought 77.87, new stop at 77.40, target of 79.70,
unrealized points = + 0.26, unrealized P/L = + $25
EWJ long (full position from July 15 – 17) –
bought 7.81 (avg.), stop at 7.35, target of 8.80,
unrealized points = (0.15), unrealized P/L = ($132)
We trailed a stop on SMH and it hit our trailing stop a little prematurely, locking in small profits. We also bought PPH per yesterday’s newsletter and are still long EWJ.
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