Commentary:
If you would have asked me yesterday whether or not I thought the broad market will trade much higher in the coming weeks, the answer I gave you would have been totally dependent on the time of day you asked me. If asked in the late morning, I would have said, “Yes, the market probably goes significantly higher over the next week or two.” However, if you would have asked me in the late afternoon session, my answer would have been totally the opposite. Why? Because the type of price action we saw yesterday went from being quite bullish to equally bearish, all in the course of one day.
As you probably know, the major indices each gapped up and opened at new 52-week highs yesterday after forming a multi-day base of support at their previous highs. The morning gap up was backed by an increase in volume, which confirmed the breakout was legitimate. More importantly, the opening gap held through the first hour of trading, which usually means the gap will hold the rest of the day and the market will go higher. But the situation quickly changed in the late afternoon. Institutional selling stepped in around 2:00 pm EST and caused the major indices to not only reverse their intraday uptrends, but to actually close the gaps! It’s rare for a gap to become filled in the afternoon rather than the morning, and this price action was quite bearish. Consider that all eyes were watching for a break of the 52-week highs, which occurred, but was not able to be sustained. Without a doubt, this made the bulls nervous. It’s very obvious that the indecision and tug-of-war is still in effect, as evidenced by this type of price action.
Each of the major indices closed higher than the previous day, but it is deceiving to only look at the change from the previous day’s close because nearly all the gains were given back intraday, causing the market to close only marginally higher. If the major indices would have closed near their highs yesterday instead of selling off during the afternoon, the broad market would look great for further follow-through to the upside over the next week or two. However, the selloff changed everything because now the daily charts of the major indices look quite bearish. Each of indices are now showing a failed breakout attempt to set new 52-week highs. I have annotated this on daily charts of each of the major broad-based ETFs below:
Looking at the first chart above, notice that SPY traded above its prior 52-week closing high of 104.70 on an intraday basis, but sold off and closed at 104.28, which was also below the previous day’s high of 104.39. Obviously, this is not the kind of performance you want to see from the S&P 500 Index when testing such an important level as a 52-week high, especially given the base of support that had been forming in the prior days. That 4-day volatility contraction and base of support should have acted as a springboard to cause SPY to close much higher, but it did not. Next, take a look at DIA (Dow Jones Indu. Avg.):
DIA closed at a new 52-week high of 97.14, marginally higher than its prior high of 96.95. However, it’s important to point out that the only reason this occurred was due to the trading from the 4:00 pm EST close until 4:15 pm EST. Remember that the closing prices of the major indices are based on their 4:15 pm closes, the same time the futures market closes trading.
The closing price of DIA at 4:00 pm EST was 96.95, exactly a double top at its prior high. So, even though DIA closed at a new 52-week high, I would need to see more confirmation before getting excited about it. Finally, take a look at the Nasdaq. Since ONEQ (Nasdaq Composite Index) has not been trading long enough to create a daily chart, I have annotated a chart of QQQ (Nasdaq 100 Index) instead:
Much like SPY, notice that QQQ traded above its prior 52-week high of 34.86 on an intraday basis, but sold off and closed below it at 34.69. QQQ also closed below the high of the previous day, which was 34.84. Therefore, we can also declare that QQQ failed to break out to a new 52-week high, despite its base of support that was forming during the prior days. Again, not the type of price action the bulls want to see.
When this occurs, the market often reverses rapidly because bulls will usually start bailing out in fear. This, in turn, attracts short sellers as well. Of course, it’s difficult to confirm that yesterday was a failed breakout attempt because the broad market still closed slightly higher on the day. But, today’s price action will be a key determining factor. If the major indices close lower today, I would say there is a pretty good chance that the market will be in for some significant selling next week. If, however, the market blows off yesterday afternoon’s selling and rallies to close near yesterday’s highs, it will be much more bullish and traders may consequently ignore yesterday afternoon’s selloff. It goes without saying that caution is still required due to the extreme amount of indecision the market is seeing. We will re-assess on Monday after seeing what type of follow-through we get today. Have a nice weekend.
Today’s watch list:
IWM – iShares Russell 2000 Small Cap Index
Short
Trigger = below 102.70 (below yesterday’s low)
Target = 98.70 (support of 50-day MA)
Stop = 104.30 (above yesterday’s close)
Notes = IWM has been showing relative weakness the past few days, as evidenced by how low it traded into the previous day’s range yesterday. It also formed a “doji star” candlestick yesterday, indicating potential reversal and indecision. So, we are looking to short IWM as a multi-day “swing trade” on a break of yesterday’s low. If you have difficulty getting borrowed shares of IWM to short, consider shorting either SPY or MDY on breaks of yesterday’s lows instead. Both of those are decent short setups on breakdowns as well.
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:
There were no “official” trade calls yesterday and we remain in cash, looking for some confirmed direction in the major indices.
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