Yesterday began with an opening gap up that followed through on the
momentum of last Friday’s bullish reversal. However, the bullish follow-through
was short-lived and the broad market subsequently drifted lower throughout the
day after the initial opening gap. Both SPY (S&P 500 Index) and DIA (Dow
Jones Indu. Avg.) trended lower throughout the day, but QQQ (Nasdaq 100) showed
slight relative strength and traded sideways, in a tight range. Even though SPY
and DIA trended lower on an intraday basis, the range was very narrow and not
ideally suited to intraday trading. Before the closing bell, the major indices
found support near Friday’s closing prices, but the ensuing bounce was not very
impressive. The S&P 500 and Dow Jones both closed fractionally higher and
the Nasdaq Composite closed 0.93% higher. IWM (Russell 2000 Small Cap Index)
showed the most relative strength and also closed 1.28% higher. Since that
sector was weak last Friday, this was merely an example of typical sector
rotation. Internets (HHH) and Semiconductors (SMH) both showed relative
strength, but Biotechs (BBH) were among the weakest sectors of the day.
We mentioned in yesterday’s newsletter that the best way to predict the
market’s ability to rally to new highs is to pay close attention to relationship
between total market volume and price. Each of the major indices closed higher
yesterday, but did so on much lighter volume than the previous day. Volume in
the NYSE was 4.77% lighter than the previous day, but was 23% lighter in the
Nasdaq. Since last Friday’s volume on the reversal day was already lighter than
the volume of the previous three days of selling, yesterday’s light volume is
not exactly what the bulls would want to see if the market was going to resume
its reversal. Ideally, it would have been a more bullish scenario if the broad
market had closed higher, but also on higher volume. Nevertheless, advancing
volume outpaced declining volume in both markets, so we saw some mixed signals.
Just as the 50-day moving average acted as support for the major indices
last Friday, the 20-day moving averages acted as resistance yesterday. Technical
analysis dictates that prior support levels become the new resistance levels
once those support levels are broken, and yesterday’s resistance of the 20-day
moving averages was a prime example of this basic tenet. I have illustrated how
the 20-day MA acted as resistance on each of the major broad-based ETFs below:
Even though QQQ showed relative strength to SPY and DIA yesterday,
notice how it was unable to even probe above the high of its 20-day MA, unlike
SPY and DIA. Also note the candlestick pattern that formed on the daily charts
yesterday: narrow body with long tails on both sides of the body. While it is
not technically a “doji star,” this pattern often indicates indecision. The
simple way to play it the next day is to short below the low of day and buy
above the high (only if volume confirms).
In addition to resistance of
the 20-day moving average, SPY (S&P 500 Index) ran into resistance from the
prior high of October 22, which was the first day the market gapped down
significantly last week. Interestingly, the 200-period moving average on the 15
minute chart also perfectly converged with the October 22 high. The combination
of the 200-period MA and the high of October 22 caused the S&P’s morning
rally attempt to stop dead in its tracks. The 15 minute chart of SPY below
illustrates this convergence:
As you can see, yesterday’s high in SPY was 104.18 and the
prior high from October 22 was 104.19. That’s the power of resistance that is
formed from big gaps, such as the one that occurred on the opening of October
22. The convergence with the 200-MA makes the resistance even more powerful.
Since each of the major broad-based ETFs have similar chart patterns
right now, they all have similar resistance points to watch going into today.
Primarily, we need to watch the 20-day moving averages. The exact price level of
20-day MAs is listed (in blue text) on each of the daily charts above. Beyond
the 20-day moving average, expect the October 22 high (below the gap) to provide
resistance, as it did with SPY yesterday. To make your job easier, here are the
price levels for the October 22 highs:
SPY – 104.19
QQQ – 34.51
(20-day MA also at 34.48)
DIA – 96.96
If any of these ETFs have
enough momentum to break above their October 22 highs listed above, there is a
good chance we will see more follow-through to the upside. As for support,
yesterday’s lows will be the primary support level to watch. If the major
indices break through yesterday’s lows, we would expect a retest of last
Friday’s lows within the next day or two. Based on the weakness we saw yesterday
afternoon, we took small position size of both QQQ and DIA short overnight, in
anticipation of a retest of the October 24 low. Since we can place a stop just
above yesterday’s highs, we have a favorable risk/reward ratio of approximately
1:3; our potential reward in points is three times greater than our potential
loss if we are wrong.
The main factor in today’s trading will be the
market’s reaction to the FOMC meeting, in which the Feds will be announcing
their decision on interest rates at 2:15 pm today. Virtually all the economists
are expecting the Feds to leave rates unchanged, but the market will be paying
attention to the comments that are made with regard to future policy. As you may
know, trading is typically quite erratic on the afternoon of a Fed day, so you
may wish to conclude your trading operations before 2:15 pm today.
Today’s watch list:
Since we already
have two open positions from overnight, there are no new plays for today.
However, we may add to the open positions if they go in our favor. We will send
an e-mail update if we do. Since the FOMC meeting is today, there is no reason
to be overly aggressive with quantity of trades today.
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 (HALF position from October 27) –
shorted 96.29, stop at
96.85, unrealized points = + 0.00, unrealized P/L = + $0
short (HALF position from October 27) –
shorted 34.20, stop at 34.52,
unrealized points = (0.05), unrealized P/L = ($10)
Per an intraday e-mail alert, we shorted HALF positions of both DIA
and QQQ thirty minutes before the close, based on broad market closing weakness.
Initial stops are above yesterday’s high, although we will trail a stop tighter
as we are able.
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