Commentary:
There is not a whole lot to say about yesterday. The major indices spent their second day consolidating in a narrow range, correcting by time and digesting the gains of the prior week. Each of the major indices closed slightly higher on the day as volume dropped off slightly below the previous day. While volume was slightly lower, the volume for the entire week has been healthy and hovering around the 50-day moving average, confirming that institutional money has returned. The Semiconductor (SOX) Index and the Nasdaq both recovered from their relative weakness the prior day and acted well yesterday. There was not any major divergence between the Dow, S&P, and Nasdaq and each of the primary sectors we follow acted similarly. Even Software (SWH), which started the day weak, recovered and closed at the highs. Bullish hammer candlesticks were found in many of the sector HOLDRS such as PPH, UTH, and SWH.
The broad market has obviously been acting very strong because it did not sell off yesterday, and buyers stepped in to support the major indices when they tested their respective prior day’s lows. However, yesterday was the EIGHTH consecutive day of gains in the S&P! While our primary goal is to trade in the direction of the trend, I am now quite cautious about entering any new long positions in the broad market after eight consecutive days of gains. At the same time, short sales are risky here because the market has obviously been proving its resiliency. Short sales in the broad market are probably best done on an intraday basis, just as “scalps” in which you look for small profits. If you are not a day trader, it’s probably not a good idea to be short the broad market here.
Although we feel it is risky to either buy OR short the broad market here, much better risks and potential rewards can be found by trading individual sector HOLDRS that are showing relative strength or weakness to the broad market. By doing so, you increase the odds of a profitable trade and decrease the risk of loss if the broad market suddenly turns in the opposite direction. For this reason, we initiated a short sale in RTH (Retail HOLDR) yesterday because it was showing relative weakness and we like the risk/reward for a potential multi-day move to the downside. We also still like PPH long for re-entry based on support of its 20-day MA and are also considering buying back into UTH because it held up well after we took profits yesterday. So, while there are a few individual sectors that seem worthy of new entries, we are recommending caution with trading the broad market in EITHER direction right now until it either corrects a while longer OR breaks out to a new high on strong volume.
Today’s watch list:
PPH – Pharmaceutical HOLDR
Long
Trigger = above 74.90 (above yesterday’s high)
Target = 76.90 (prior “swing high” on daily chart)
Stop = 74.20 (below the consolidation)
Notes = We took profits on PPH two days ago, but we like the way it consolidated and held up through the close. It seems that PPH is poised to make another leg higher to at least test its prior high on the daily chart. We will look to buy back into PPH above yesterday high at 74.90 area and will use a stop below yesterday’s consolidation, which gives us a positive risk/reward ratio.
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:
-
UTH long (HALF position from Sept. 2) –
bought 70.77, sold 71.74, points = + 0.97, net P/L =
+ $47
Open Positions:
-
RTH short (from Sept. 4) –
shorted 90.76, stop at 91.55, target of 88.20, unrealized points = (0.33), unrealized P/L = ($33)
Notes:
We took profits on the second half of UTH yesterday and shorted RTH per e-mail alert.
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