Commentary:
Since many private and institutional traders were absent from trading due to the Yom Kippur holiday, yesterday’s trading day was basically a non-event. The major indices each closed fractionally higher on the day, but volume was so light that it felt like the mid-day doldrums lasted the entire day. Volume in the NYSE came in 34% lighter than the previous day. To put this into perspective, only 987 million shares traded hands, which made it was the lightest volume day since August 29 (which was very light due to the East Coast power blackout). As we often see on light volume days, yesterday’s intraday trading range was incredibly tight in the broad market. The S&P futures spent most of the day in a sleep-inducing three-point range, while the Nasdaq futures were not much more exciting. Due to the light volume and narrow trading ranges, the ETFs did not do much yesterday and we remained in SOH (Sitting On Hands) mode the entire day. However, some of our subscribers profited from trading a few individual stocks that we discussed in the ETF Real-Time Room yesterday.
It was quite important to see how the market followed-up to last Friday’s large opening gap and subsequent selloff during the final hour of trading. However, for the purpose of technical analysis, it is safe to say that no conclusions should be drawn from yesterday’s trading action because many of the institutional traders were absent. Therefore, all eyes will be closely watching the price action of the next several days. In my opinion, the next one to three days will be critical in determining the market’s next major move. As I mentioned in yesterday’s newsletter, I presently have a neutral opinion of which direction the broad market will go from here and my opinion will remain that way until I observe the follow-up trading action to last Friday. Since there are several mixed technical signals happening, let’s take a look at both the bullish and bearish points of view, based purely on technical analysis.
The bulls can argue that last Friday’s huge opening gap up day marked the end of the short-term price correction because the day’s high volume marked the return of institutional accumulation and also caused many hedge funds to cover their short positions. Bulls can also point to the fact that each of the major indices are now back above their 20-day moving averages and that the Nasdaq Composite never broke below its primary support of the 50-day moving average. On the other hand, bears will tell you that the selling we saw during the final hour of trading last Friday pointed to institutions who were selling into strength. Bears will also point out that the head and shoulders patterns which have been forming on the daily charts of both the S&P and Dow are still technically intact. The heads, which are the highs of September 18, were never broken, although the right shoulder is now much higher than the left. This means the broad market now has the potential to form a double top right here, which would promptly send the major indices back down to test last week’s lows. Finally, bears will point out that last Friday’s high volume accumulation day was the only bullish volume pattern we have seen during the past two weeks because most of the other days were marked by high volume selling and lighter volume buying. So, there are the cold facts and you can form your own opinions from this information. Rather than guessing, I prefer to wait and let the market show me which way it will go before getting aggressive on either side of the market.
On a shorter-term basis, the key support levels to watch going into today will be the lows of the past two days on both the S&P and Nasdaq futures. If these lows remain intact, it will mean that last Friday’s gap is providing price support that could form the basis for building a base to break out to new highs. However, if the futures CONVINCINGLY break below the two-day lows, there is a good chance that the gap will become filled, which would be likely to accelerate selling momentum. Below is an hourly chart of SPY (S&P 500 Index) that illustrates this:
Looking at the chart, notice also how the 20-period moving average nearly converges with the two-day low. Therefore, keep an eye on the 20-MA, as well as the two-day low. I have only shown you an hourly chart of SPY, but I recommend that you also look at hourly charts of DIA, QQQ, and ONEQ, then write down the prices of the two-day lows, as well as the two-day highs. By knowing the key price levels to follow, you will be more prepared to capitalize on the market’s next move, whichever direction it may be.
Economic reports are light this week, but remember that several key companies will be reporting earnings. Alcoa (AA) is a Dow component that reports after the close today. DNA and YHOO are two biggies who will be reporting tomorrow. Consumer Credit will be released at 3:00 pm EST today, but that is typically not a market-moving number.
Today’s watch list:
DIA – DIAMONDS (Dow Jones Industrial Average Tracking Stock)
Short
Trigger = HALF position below the 20-minute low, HALF position below 95.62 (below two-day low)
Target = 94.10 (support of 50-day MA)
Stop = 96.30 (above yesterday’s close)
Notes = We will only short DIA once it breaks below its low of the first twenty minutes of trading. If that does not happen, we will not short it. HALF position will be shorted on the break of the 20-minute low and second half will only be shorted on a break of 95.62. Will trail the stop lower as we are able and will email and updates.
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:
-
(none)
Open Positions:
-
(none)
Notes:
We were all cash yesterday and there are presently no open positions.
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