Commentary:
Yesterday was the ultimate tug-of-war in the broad market. After an opening gap down to the previous day’s low, the S&P 500 (SPY) and Dow Jones Industrials (DIA) both sold off and broke below last Friday’s low. Once these indices began trading into the gap from Friday morning, we expected the gap to become filled, but the major indices reversed in the late morning and rallied to new highs before finding resistance at the previous day’s close. Going into the late afternoon, sellers once again took control and caused most of the major indices to retrace nearly 80% of the day’s intraday range. When an intraday retracement of more than 61.8% happens, it typically is enough to reverse the momentum and trend of the market. But, rather than continuing lower to set new highs, the market once again reversed and, this time, finally broke out to new highs. The Nasdaq Composite (ONEQ) broke above last Friday’s highs and closed 0.76% higher. The S&P 500 (SPY) closed 0.47% higher, right at Friday’s high, while the Dow Jones (DIA) closed 0.62% higher, but failed to break Friday’s high. I am sure anyone who was trading intraday would certainly agree that it was an incredibly choppy day caused by a vast amount of indecision. In summary, the day consisted of a failed breakdown to new lows in the morning, failed breakout to new intraday highs in the late morning, failed breakdown in early afternoon, and finally a breakout that held into the close. Unfortunately, I was correct with my prediction that the mixed bullish and bearish technical signals we discussed in yesterday’s newsletter would cause trading to be erratic. This made it very difficult to profit from the broad market on either the short OR long side. The intraday chart of SPY below illustrates yesterday’s action:
Yesterday’s volume picked up over the previous day, but was still relatively light overall. Most likely, the “big money” remained on the sidelines in anticipation of the large number of earnings reports that are due out this week. One quick look at the daily charts will show you that the each of the major indices closed within striking range of their prior highs that were set on September 18. I have annotated both the highs of last Friday and the September 18 highs on daily charts of each of the major broad-based ETFs below. I recommend you write these levels down and watch for potential break outs above these levels over the next day or two:
MDY (S&P Mid-Cap Index) showed relative strength and actually closed at a new 52-week high yesterday. IWM (Russell Small Caps) closed just below its high, much like SPY. I would have also provided a daily chart of ONEQ (Nasdaq Composite Index), but it has not been trading enough days to show the data on a daily chart.
As you can see from the charts above, we’re approaching major decision time in the broad market. If the market is able to break through these highs, it will represent new 52-week high prices and it will be relatively safe to go long and buy the market. However, let’s just wait and see if these highs can be broken before getting aggressive on the long side. Until these highs are broken, the broad market is likely to be choppy and indecisive, just as it was yesterday. Therefore, you probably have a better risk/reward by avoiding the broad market ETFs such as SPY or DIA and focusing instead on the sector ETFs such as SMH, RTH, BBH, etc. Through buying the sectors with the most relative strength and/or shorting those with the most relative weakness, you can increase your odds of a profitable trade, even if the broad market reverses direction.
The major indices have closed higher for five days in a row, so they may take a breather before breaking out (if they do). There’s no reason to be in a hurry to rush in and buy right now, so we are going to utilize some patience, especially given the fact that the market will have to digest all these earnings reports. As I previously mentioned, we will have a much better idea where the market is headed by the end of this week, but take it easy in the meantime because one surprise earnings report, either good or bad, can cause an erratic and unexpected move. Just look at last Friday’s jobless report as an example of how susceptible the market is to news right now. We will re-analyze thoroughly after the market has had a chance to test these prior highs.
Today’s watch list:
Watch MDY and ONEQ, both of which have been showing relative strength. Also keep an eye on SMH (Semiconductor HOLDR), which may break out today. We are not listing specific entry prices today because we want to first analyze how well the market acts as it approaches the key breakout levels. However, if the broad market breaks out to new highs on strong volume, we will probably buy a few ETFs and, as always, will be sure to send you an e-mail update informing you of such.
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:
-
DIA short (from October 7) –
shorted 95.63, covered 96.20 (avg.), points = (0.57), net P/L = ($120)
IWM short (from October 7) –
shorted 102.35, covered 103.30 (avg.), points = (0.95), net P/L = ($98)
Open Positions:
-
(none)
Notes:
We used the MTG Opening Gap Rules to short DIA after it confirmed a break of support, but the market reversed and stopped us out. We also shorted IWM per intraday e-mail alert, but that was also stopped out when market reversed. We incrementally covered both short positions to reduce risk and the cover prices are listed above.
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