It was a choppy, indecisive day marked by a modest decline in volume, but the S&P 500 Index and Nasdaq Composite both closed with marginal gains yesterday, while the Dow Jones Industrials closed fractionally lower. SPY (S&P 500) and ONEQ (Nasdaq Comp.) both found support at their lows of the previous day, but also closed well below the previous day’s intraday highs. Due primarily to weakness in IBM and CAT, DIA (Dow Jones Indu.) showed relative weakness and lagged behind both SPY and ONEQ throughout the entire day.
Based on its relative weakness, as well as the break of its hourly uptrend line, we shorted DIA yesterday with the intention of it being a multi-day “swing” trade. Unfortunately, we were stopped out only an hour later when DIA spiked to a new intraday high and retraced more than 61.8% of its range from the previous day’s high down to yesterday’s low. We often set stops near the 61.8% Fibonacci retracement level because trends will usually reverse if an index retraces more than 61.8%. However, yesterday was much like a roller coaster because DIA retraced about 70% of its downside move, but then immediately reversed and headed back down towards the low of the day. Nevertheless, it reversed one more time into the close and rallied back to close in the middle of its two-day range, right at the 50% retracement level. Once again, it was really difficult to remain in any broad-market ETF trades because the intraday trend (or perhaps I should say lack thereof) reversed several times throughout the day. The 15-minute intraday chart of DIA below illustrates how sharply DIA retraced after we shorted it, as well as its subsequently erratic performance. :
As you can see, it is difficult to stay in a position (either long or short) when a retracement is so severe. Interestingly, yesterday’s retracement in the S&P 500 was even more extreme, but the Nasdaq Composite “only” rallied up to the 61.8% level. You can reduce your risk by waiting for at least a 38.2% retracement before entering a trade (as we did yesterday), but there is not much you can do about it when the market retraces most of its previous move. Because of the sharp intraday retracements in both directions yesterday, the market felt rather volatile. However, it was deceiving because the trading range of the S&P futures was (and has been) quite narrow. So, each reversal of the market’s direction was within the context of a very narrow range. This LACK OF volatility and narrow range is exactly why it has been so challenging to profit from trading the broad market lately. To be honest, it’s a bit frustrating, but we realize it is only temporary because, sooner or later, the market is bound to make a sharp move that will provide us with the volatility that we traders love!
Although intraday trading has been quite indecisive, you may find it is easier to look at a slightly longer-term view of the market by focusing more of your efforts on time frames of at least 60 minutes. In particular, we noticed that the 40-period moving average on the hourly chart of SPY has been perfectly acting as support for the index since it broke out on October 1. I have annotated this level of support on the hourly chart of SPY below:
Speaking of longer-term charts, have you looked at any weekly or monthly charts of the major indices lately? While the daily charts provide you with a relatively short-term view of what is happening in the markets, the weekly and monthly charts provide you with a “big picture” that helps you keep things in perspective. For example, let’s take a look at DIA (Dow Jones Industrial Average). On the daily chart, DIA is above all of the primary moving average levels we actively follow (20, 50 and 200-day). This, by itself, would indicate an overall upward bias to the index. However, if you take a look at the longer-term weekly chart, you will notice that DIA has just run into its 200-WEEK moving average, which is exactly the level at which it began showing weakness yesterday. Here is that level illustrated on a weekly chart:
Since the 200-period moving average is the most powerful moving average in terms of its ability to provide support or resistance, the fact that DIA is pressing against its 200-WEEK moving average is definitely noteworthy. The longer of a time frame you are analyzing, the more powerful the support and resistance levels. Therefore, a 200-week moving average is much more powerful than a 200-day moving average. So, if longer time frames are more important, we may as well take a look at a MONTHLY chart of DIA, in which each bar represents an entire month worth of data:
As you can see, DIA has also run into resistance of its 50-MONTH moving average, which is converging with the 200-WEEK moving average. When you have convergence like this, it is more powerful than if only one moving average was meeting the price, especially when you are looking at such a long time frame as weekly and monthly charts. Does this mean that the rally in the Dow is over? It’s difficult to say with any certainty because the market has certainly been resilient lately. Nevertheless, only a foolish trader or investor would ignore the potential warning of such a powerful moving average convergence. Because the time frame of weekly and monthly charts is so long, it may take weeks or months before the Dow actually pulls back away from these moving averages (or maybe not), but just be ready when it eventually does.
Today’s watch list:
EBAY was trading down four points after-hours yesterday, after they reported earnings. The other internet stocks will also probably trade lower today in sympathy. As such, we are looking at HHH (Internet HOLDR) as a possible swing short, but we want to see if the gap holds into the first reversal period before shorting it. We will send e-mail alert if we do short it or if we enter any other trades long or short.
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
DIA short (1/2 position from Oct. 16) –
shorted 97.85, covered 98.35, points = (0.50), net P/L = ($53)
We shorted half position of DIA yesterday, per intraday e-mail alert, but were stopped out for small loss. We only shorted half position to reduce risk, which is exactly what it did. We were flat overnight.
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