Despite the bearish action of last Thursday’s gap up and subsequent reversal of selling into the close, the major indices just as quickly recovered on Friday. The S&P, Dow, and Nasdaq Composite each closed just below their respective previous day’s highs as if the Thursday afternoon selloff never even occurred. Friday’s rally undoubtedly caught a lot of traders by surprise because many technical analysts and traders expected more follow-through to the downside because Thursday’s classic “gap and trap” often marks a short-term top, especially when it is in the form of a failed breakout of a daily consolidation pattern. Even though Friday’s rally erased the previous day’s losses and caused the major indices to close the week on a positive note, the reality is that the broad market continues to remain in a sideways trading range, meaning it has been neither gaining or losing ground.
While the bulls were relieved to see Friday’s rebound, it is important to realize that the volume patterns of the past two days have been relatively bearish. Thursday’s volume indicated a bearish “distribution day” because the broad market closed lower than the previous day on higher volume than the previous day. This indicated institutional selling into strength. Therefore, Friday afternoon’s recovery back to the highs of Thursday morning should have been marked by higher volume than Thursday. However, volume was 11.5% lower in the NYSE and 18% lower in the Nasdaq. In addition, advancing volume outpaced declining volume by a margin of only 1.86 to 1 in the Nasdaq and just over 3 to 1 in the NYSE. While the breadth was positive, this is not very impressive and overall has not been the type of volume pattern we should be seeing in a strong bull market. Again, this just confirms that we are likely to remain in a trading range for a while.
Last week was a lesson in the power of daily moving averages. While there are many different periods of moving averages you can follow, we have found the 20, 50, and 200-day simple moving averages to be the most important ones to closely monitor when doing research on your daily charts. As an example, the 50-day simple moving average clearly demonstrated its importance last week as it provided price support for SPY (S&P 500 Index) on numerous days. The support of the 50-day moving average is why we were reluctant to short SPY on Friday morning, despite Thursday’s bearish action. The daily chart of SPY below illustrates how it has bounced off the 50-day moving average on several recent days:
The faster-moving 20-day moving average has also been key during the past week. On the chart of SPY above, notice how the 20-day moving average was acting as resistance prior to the last two trading days. Furthermore, the 20-day moving average has been acting as price support for DIA (Dow Jones Indu. Avg.), while formerly acting as resistance for SPY. This confirms the fact that the Dow has been showing more relative strength than the S&P during the past several weeks. Notice how DIA has bounced off its 20-day MA:
Like the Dow, the Nasdaq Composite has also been continuing its pattern of relative strength and remains above its 20-day moving average and well above its 50-day MA. Basically, the Dow and Nasdaq have been showing relative strength and divergence to the S&P, so it is important to be aware of that when trading the broad-based ETFs.
How long can a sideways trading range continue? As long as the quantity of buyers and sellers remains in relative equilibrium. August is typically one of the slowest months of the year because many traders are focused more on family vacations than trading. Therefore, I would not be surprised to see the relatively narrow range continue for a while longer. If it does, the most important thing you can do is not to force the trades to happen. If you do find not any obvious and clear trade setups on a given day, don’t force them to happen. Instead, simply sit on the sidelines and protect your capital. Too many traders feel they need to be in the markets every day, but the reality is that part of your job is indeed knowing when to stay out of the markets as well. In fact, having the patience and discipline to not do anything when market conditions are not ideal is one of the most important skills that will directly impact your bottom line every month. If you do see a low-risk trade setup, then you should aggressively pursue it. But if not, there is always the next day and you must remember that CAPITAL PRESERVATION needs to be your first and foremost important goal every single day. After all, it is difficult to make any profits in your account if there is no capital to work with.
Today’s watch list:
DIA – DIAMONDS (Dow Jones Industrial Avg. Index)
Trigger = above 93.07 (above consolidation at 93)
Target = 93.97 (test of 52-week high)
Stop = 92.65 (below the breakout point)
Notes = We will assess whether or not to hold DIA longer if it tests the 52-week high at 93.97, but are only looking to net a point for now. We will also only be trading 1/2 position size if it triggers.
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
EWJ long (full position from July 15 – 17) –
bought 7.81 (avg.), new stop at 7.45, target of 8.80,
unrealized points = (0.03), unrealized P/L = ($32)
EWJ bounced back above its 20-day moving average on Friday and is once poised to make a run. We remain long and have raised the stop. No other open positions exist.
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