Not surprisingly, the broad market finally closed lower on Friday after eight consecutive days of gains. Considering last week’s rally, Friday’s losses were relatively minor. The Dow, S&P 500, and Nasdaq each closed less than 0.9% lower, but the Dow showed the most intraday relative weakness of the major indices. The Nasdaq showed relative strength once again due to gains in the Semiconductor (SOX) Index, which broke out of a week-long consolidation pattern. Volume was slightly lower in the NYSE, but was a bit higher in the Nasdaq. Declining volume also outpaced advancing volume by a small margin in both the NYSE and Nasdaq.
Since the Nasdaq closed lower than the previous day, but on higher volume, this means that Friday was technically a “distribution day” because trading activity increased but prices closed lower. Although distribution days are generally considered to be bearish, this was the first distribution day the Nasdaq has seen in a long time. If the Nasdaq would have several more distribution days in the upcoming week, it would be cause for alarm if you are a bull. However, a sole distribution day is not a big concern given the recent rally and breakout to new 52-week high. It just means that modest caution remains in order for entering new long positions.
It is difficult to read too much into Friday’s trading action as it relates to what we expect in the coming days. The broad market closed lower, but most of the individual sectors and indices are still within the consolidation range of the past week. As such, it would NOT be difficult for the major indices to break out to new highs this week. However, the S&P 500 and the Nasdaq are both well above their 20-day moving averages, meaning they may have gotten a little bit ahead of themselves and need to digest the gains for a few more days.
The 20-day moving average is a key indicator to watch when determining the risk/reward of entering new positions in the direction of a trend because it usually acts like a magnet that has a tendency to pull the prices of indexes towards it whenever they get too far away. Therefore, a retracement back down to a 20-day moving average provides a low-risk entry point for buying new positions when in an uptrend. This, however, is only true when in a trending market. If in a sideways or range-bound market, the prices will continually cross back and forth over the 20-day moving average. The daily chart of the S&P 500 below illustrates how the 20-day moving average has acted as a magnet during the uptrend from the first half of this year:
On the chart above, notice how the S&P 500 is now well above the 20-day moving average, but is holding above its prior highs of 1015. This means we may have the start of a new uptrend on the daily chart, but the real test will be how well the index acts as it approaches the 20-day MA. Most likely, the S&P will trade sideways to slightly higher for the next few days as it allows the 20-day moving average to rise up and provide support for another rally. As long as 1015 holds as support, our overall bias will be on the long side. The Nasdaq is even more extended from its 20-day moving average. However, the Dow is in danger of breaking below its prior highs. While the daily charts provide a good overview for multi-day “swing” trades, the hourly charts provide a more precise picture of how well a particular index is holding in a breakout. We noticed, for example, that QQQ (Nasdaq 100 Index) is well above its prior high that was set on August 22, but DIA (Dow Jones Industrials) has already retraced back to its prior high. The two hourly (60-minute) charts below illustrate this divergence:
While the S&P 500 and Nasdaq both look very solid, I am keeping a close eye on the Dow in the coming week because it acted very weak on Friday. If the prior highs from August 22 do not hold as support, we could see a wave of selling hit the Dow because it would indicate that last week’s breakout failed to hold. So, watch DIA and the Dow closely around the 9500 level.
Overall, there is plenty of support below Friday’s closing prices in the major indices, which should prevent the broad market from going much lower in the short-term. However, there is now overhead resistance from the trading range of last week. Therefore, expect intraday trading to be choppy until the market breaks above last week’s highs or retraces down to its 20-day moving averages. Most importantly, watch the Dow for clues as to the health of the large caps, especially around that 9500 level.
Today’s watch list:
TLT – iShares 20+ Year T-bond Index
Trigger = above 84.20 (above Friday’s high)
Target = 85.70 (resistance of the 50-day MA)
Stop = 83.45 (below the breakout level)
Notes = The Treasury Bonds have been getting hit pretty hard lately, but the daily chart is now showing a higher low on the last selloff and is now poised to break resistance of a prior high. This means we will probably see at least a Fibonacci bounce up to 38% of its last selloff. Our initial target is the 50-day MA, but we will trail a stop to maximize gains beyond that.
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
RTH short (from Sept. 4) –
shorted 90.76, new stop at 90.75, target of 88.20, unrealized points = + 1.07, unrealized P/L = + $107
PPH long (from Sept. 5) –
bought 74.95, stop at 74.20, target of 76.90, unrealized points = (0.32), unrealized P/L = ($32)
RTH dropped 1.40 points lower on Friday, giving us an unrealized profit of just over one point so far. Notice we have lowered the stop to breakeven, thereby removing the risk from the trade. We will continue to trail the stop lower to lock in gains as we are able. PPH long also triggered on Friday and we are now long with same stop as before.
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