After five consecutive days of gains, the major indices each closed lower yesterday, although losses were mild and volume declined slightly from the previous day. Right out of the starting gate, the S&P 500 Index (SPY), the Nasdaq Composite (ONEQ), and the Dow Jones Industrial Average (DIA) each tested resistance of their previous highs that were set on September 19. The S&P 500 came within one point of trading above its September 19 high, while the Nasdaq Composite actually traded less than one point higher than its previous high. However, sellers stepped in within minutes after the markets’ opening, setting in motion a downtrend that remained intact throughout the entire day. Although the market trended lower intraday, the range was once again very tight and narrow, which forced us to be cautious with entering new trades. Nevertheless, we made two profitable intraday trades by shorting IWM and ONEQ in the ETF Real-Time Room yesterday, but we were once again all cash overnight.
Since the broad market closed right in the middle of the previous three days’ trading range, yesterday represented the fourth day that the major indices have been trading in a narrow, sideways trading range. As we mentioned a few days ago, this should not be surprising because the indices are at such pivotal price levels right now that it is causing a major tug-of-war between the bulls and bears. The bulls keep buying in anticipation of the major indices breaking their September 19 highs and setting new 52-week highs, while the bears are selling into the range in anticipation of a double top. Thus far, the end result has been very choppy intraday trading conditions with minimal follow through on both sides of the market.
The most important thing to remember right now is that volatility contractions, such as the one we have been seeing for the past four days, tend to move quickly and sharply once they eventually resolve themselves. So, be prepared for either a strong breakout to new highs or a steep selloff below the trading range that is likely to come without much warning. Think of the current trading range as a spring that keeps getting compressed tighter and tighter with each passing day that the range continues. The harder that spring is compressed, the more it will bounce when it is eventually released.
Obviously, the big question on everyone’s minds is which direction the market will go once the range is broken. Unfortunately, I don’t really have a strong opinion either way because there are too many mixed signals. As such, we have been and continue to take a “wait and see” approach to the market because it is much safer than trying to guess, which involves big risk at this point. Most likely, the interpretation of the plethora of earnings reports that will be released over the next several weeks will be the determining factor. It’s not whether or not the companies report good earning, but rather the market’s REACTION to the earnings that matters the most. Some traders are saying that the market has already priced high earnings expectations into the current market prices, while others say that the market will continue to rally due to sharp earnings growth. The passage of time will certainly tell us who is correct. Yahoo! and Genentech were two big companies who reported earnings after the close yesterday, so perhaps today’s market reaction will yield some clues.
Today’s watch list:
(As the trading range continues, there are no new plays for today. However, we will e-mail you if the major indices break out of the range and we take any new swing trades.)
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
We had two profitable intraday trades in the ETF Real-Time Room yesterday, but there were not any Wagner Daily swing trades. We remain all cash.
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