Thanks to another day of narrow-range and light volume trading, the major indices closed slightly higher last week, but without much fanfare. After breaking out to new 52-week highs last Thursday, the major indices spent the next day simply consolidating near the lows of the previous day’s range. Volume was nearly 30% lower than the previous day and breadth was mixed. The S&P 500 Index spent the entire day in a yawn-inspiring 5-point trading range, while the Nasdaq Composite oscillated within a 15-point range. When the closing bell rang, the Dow Jones Indu. Avg. was down 5 points, the Nasdaq Comp. was up 3, and the S&P 500 Index was down less than one point. If you missed Friday’s trading session, you sure did not miss anything!
As we enter a new week, here are what I consider to be the main things to consider. Since the surprise opening gap on October 3, the major indices have slowly been grinding higher. Due to the price consolidation at the current highs and lack of overhead resistance within the past year, the daily charts are pointing to the probability of higher prices within the short term (next one to four weeks). However, as you probably noticed, momentum and follow-through has been lacking on every breakout attempt. The broad market has been starting out with strength in the mornings, but running out of gas in the afternoons. Last Thursday’s gap up to new 52-week highs, then subsequent selloff in the afternoon was a good example of this.
Because of the quantity of failed breakouts and breakdowns we have recently been seeing, buying the breaks of resistance or shorting breaks of support are both considered risky strategies right now. While buying the breakouts has been working for most of the past year’s rally, the sentiment seems to be gradually shifting. Instead of buying breakouts and shorting breakdowns, consider buying retracements (pullbacks) to price support levels and then selling into resistance. The most basic support and resistance levels are usually found at the previous days opening and closing prices, as well as the previous day’s high and low. I have illustrated an example of this on the 15-minute chart of SPY (S&P 500 Index) below:
On the chart above, notice how SPY found support at the previous day’s low, just below 104.00. This low around 104 also corresponds to the closing price of October 8, two days prior. As for resistance, notice that SPY found resistance around 104.50, which is the low of the previous morning, as well as the high of the previous day. In this example, you would have been able to predict basic support and resistance levels simply by looking at the open and close, as well as the highs and lows, of the previous several days. Therefore, the 104.50 will act as resistance today, unless SPY opens above that price, in which case the 104.50 level will become support. Above 104.50, watch the high of October 9 as the next resistance, around 105.22. If SPY sells off, the low of last Friday, just below 104, is likely to act as support. So, as you can see, technical analysis often works best when you keep it simple! Moving averages and other indicators work well, but the most basic support and resistance levels will always be found at the four levels we discussed: previous open, close, high and low prices. I recommend you mark these levels at the start of each trading day for each of the broad-based ETFs (SPY, DIA, QQQ, ONEQ). Use the information to determine low-risk entry points to buy pullbacks to support or sell short into resistance, rather than buying breakouts or shorting breakdowns. As always, make sure your stops are in place.
As a professional trader, I continually remind myself that patience is one of the most important psychological traits to have when the market enters into an indecisive state. When I was a new trader, I felt the need to be in the market every day, for fear that I would miss something important. But I soon learned that my desire to trade every day was costing me lots of precious capital that I could have otherwise preserved if I had only been more patient. The great thing about the stock market is that it will always be here tomorrow, complete with brand new opportunities each day. So, don’t be in such a hurry to trade when there is really nothing happening out there. Chances are it will only result in a slow bleed of the capital in your account. Instead, wait until the moon, the sun, and stars all align and all you have to do is press the buy or sell button in order to have a very probable chance of making a profit. Personally, I remain in capital preservation mode right now until the market resolves itself and breaks out of its funk, one direction or another. Capital preservation mode means I only enter the very obvious trade setups and pass by the questionable ones. I also reduce my share size so that the risk is reduced, even if I am wrong. If you have been getting “chopped up” by the market lately, consider doing the same thing and you will instantly feel better about the market, not to mention your trading account will thank you. It’s a busy week for earnings with many of the “big boys” reporting this week. The good news is that the market will probably break out of this range and resolve its indecision after traders have digested this plethora of earnings reports.
Today’s watch list:
WMH – Wireless HOLDR
Trigger = above 43.95 (new 52-week high)
Target = 45.95 (Fibonacci extrapolation)
Stop = 43.20 (below last Friday’s low)
Notes = The Wireless sector has been showing relative strength to the broad market, as evidenced by a comparison on the daily charts. As such, if the broad market rallies, we expect this sector to be one of the leaders. Remember you can track the WMH index to watch the price action intraday. The index for WMH is $IWH.X. The index tells you the fair value of WMH and can tell you what price to place your limit orders at when the WMH spread is wide. Remember that absolute daily volume does not matter much when trading ETFs because the price movement is based on the underlying indexes.
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
IWM short (from October 10) –
shorted 103.28 (avg.), new stop 104.30 OR 10 cents above the opening 20-minute high (whichever is greater), target 98.70, unrealized points = (0.46), unrealized P/L = ($46)
Per last Friday’s Wagner Daily, we shorted IWM and took it over the weekend. Notice that our new stop is at 104.30 OR 10 cents higher than the high of the first 20 minutes, whichever is greater. Since the market is a bit indecisive now, this is a better way to place a stop than just using a fixed price. We will e-mail you an update if we change the stop after the market opens.
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