Keeping with the pattern we have been seeing lately, the major indices once again gapped up to open higher yesterday, rallied and broke out to new 52-week highs, sold off and closed the gap in the early afternoon, then rallied modestly to close in the middle of their intraday ranges. The S&P 500 Index, Dow Jones Indu. Avg., and Nasdaq Composite each set new 52-week closing highs yesterday, but none of the major indices closed above their prior intraday highs from October 9. Volume was light across the board, nearly the same as the previous day in both the NYSE and Nasdaq. However, the light volume could partially be attributed to yesterday’s Columbus Day holiday. Breadth was positive and advancing volume outpaced declining volume, although the ratio was lower than we have been recently seeing.
Yesterday marked the third time since October 3 that the broad market has begun the day with an opening gap up, morning rally, afternoon selloff that closes the gap, then rallies modestly into the closing hour. The hourly chart of SPY (S&P 500 Index) below illustrates these past occurrences:
As you can see, the broad market has been slowly grinding higher since October 3, but has been plagued with a lack of follow-through on intraday trends. Out of the past seven days, notice there has only been ONE day in which SPY has trended steadily higher throughout the entire day (October 7). With the exception of that one day, intraday trends have frequently been reversing in the middle of the day. To confuse the situation even more, notice how many gaps have been occurring the next morning, in the opposite direction of the previous day’s trend. For example, SPY closed near its intraday high on October 6, but gapped down to the previous day’s low the following morning. Then, SPY closed near its lows after trending down during most of the session on October 8, but gapped up to new highs the following morning (which subsequently sold off in the afternoon). Finally, SPY consolidated at the lows on October 10, but gapped up the next morning, rallied to new highs, but once again sold off in the afternoon. Pretty fun stuff, isn’t it?
Needless to say, this lack of follow-through and gaps in the opposite direction of the previous day’s trend have made it quite difficult to profit from swing trades on both the long and short side of the market. Instead, the environment has been more conducive to “scalping,” which is a rapid method of day trading. Since I am more of a swing trader than a “scalper,” I am not ashamed to say we have been getting stopped out more frequently than usual. But, that’s just part of the standard deviation that we have to accept along with the string of profitable months we have had over the past year. The most important thing to do now is maintain your patience and discipline, stick to your stop losses, and preserve that capital! Remember that the losses from five losing days can be easily made up in one good day IF you keep your losses tight on the losing days and let your profits ride when you do catch a winning trade. It’s not the percentage of the time you are right that matters, but it’s the bottom line at the end of the month.
As I write this morning’s newsletter, several large companies have just reported better than expected earnings. Bank of America beat profit estimates by 13% and Merrill Lynch beat by 20%. However, the reaction in the pre-market futures is one of modest selling pressure. So, it’s interesting that these strong earnings reports have not rallied the futures as they have recently done in weeks past. Because of the lack of follow-through in the market, I’m not going to make any assumptions out of this. But, the fact that the futures are not rallying on good news this morning is an observation worth noting. Intel reports after the close today, so all eyes will be on that report. Will the market rally sharply after all these earnings reports are digested or will it sell off because the positive reports are already priced into the market? It remains to be seen, but the best advice I can give you in this time of choppiness is remain on the sidelines until the perfect opportunity comes along. Cash is king!
Today’s watch list:
There are no new plays for today, but we will e-mail you an alert if we enter anything new that really catches our interest.
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.), covered 104.75, points = (1.47), net P/L = ($150)
WMH long (from October 13) –
bought 44.12, new stop 43.57, target 45.95, unrealized points = (0.36), unrealized P/L = ($36)
IWM was stopped out yesterday after it broke above its opening 20-minute high. We bought WMH when it triggered yesterday, but we are using a tight stop because the gap from yesterday morning does not seem to be holding. We want to keep minimal risk on this play.
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