we had correctly anticipated, the major indices spent yesterday digesting the
gains of the previous day as they traded sideways in a narrow range, near the
highs of the previous day. The day began with a small opening gap down, but the
major indices slowly crawled higher and eventually closed fractionally higher
than the previous day, although the overall range was tight and narrow. The
S&P 500, Nasdaq Composite, and Dow Jones Industrial Average each closed
0.1%, 0.2%, and 0.3% respectively higher. Relative strength was found in MDY
(S&P Mid-Cap Index), which was the first of the major indices to close at a
new 52-week high. Total market volume in both the NYSE and Nasdaq was slightly
lower than the previous day, which is bullish in this case. It would be bearish
if volume came in higher on a consolidation day than a rally day because it
would indicate an increase in trading activity, without corresponding gains.
Instead, you generally want to see volume drop off on a consolidation day
because it indicates that the bears were not selling en masse into the strength
of the previous day. So, while we look for volume to increase on a rally day, we
look for a decrease on the typical consolidation day that follows the rally.
Indexes usually don’t go straight up for a long period of time without
correcting along the way, either by price or time. A correction by price is also
known as a “pullback” or “retracement” and occurs when the index sells off down
to a support level such as an intraday moving average. A correction by time
occurs when an index trades sideways in a tight range, rather than selling off
down to support. When correcting by time, the sideways price action enables the
intraday moving averages to eventually rise up to meet the price of the index,
even though the index did not sell off. In both cases, the index finds support
that it needs in order to form a base and push the price higher the next day.
But, between the two types of correction, a correction by time is more bullish
than a correction by price because it indicates there were not even enough
sellers to cause the index to drop. Instead, it tells us that the buyers merely
took a break and put the buyers and sellers in balance on the day. Likewise, if
you see a subsequent consolidation at the lows of a selloff day, it is bearish
and tells us there were not even enough buyers to cause the index to bounce.
Below is a 15-minute intraday chart of QQQ (Nasdaq 100 Index) that
illustrates how the ETF corrected by time yesterday, which allowed the 20-period
moving average to rise up to meet the price of QQQ:
Although there are a lot of moving averages we follow, the 20-period MA
on the 15 minute chart is one of the most useful moving averages for intraday
trading. If you study that time frame, you will notice that the 20-MA usually
acts as a great support or resistance level for each of the broad-based ETFs. I
even know traders whose entire trading plan is as simple as being long when an
index is above the 20-MA/15 min. and shorting when a particular index is below
it. Stops are simply placed on the other side of the moving average.
Based on the Tuesday’s high-volume rally and yesterday’s lighter volume
consolidation day, the broad market is technically poised to add to its recent
gains. However, until the prior highs from October 15 are cleared, I would not
be overly aggressive on the long side. In the October 27
issue of The Wagner Daily, I discussed the decreasing length of time
between each subsequent test of the 50-day moving average for the major indices.
The fact still remains that when the length of time between each subsequent test
of a major moving average is decreasing, it is bearish. However, it is too early
to determine if the rally will end because the broad market has not yet
attempted to break its October 15 highs. If the major indices blow through the
prior highs, like they did on every other recent test of the 50-day MA, it will
be quite bullish. But if a double top forms and the indices start heading back
down to the 50-day MA, then a lower high will be put in place, which is the
first sign of an uptrend reversal. Obviously, I am just throwing you possible
scenarios for education purposes because it is impossible to predict which of
these two scenarios will occur. But, it really doesn’t matter which one occurs.
Instead, we will just play it as we see it because that is always easier and
much more profitable than trying to be a fortune teller.
Today’s watch list:
MDY – MIDDIES (S&P Midcap Index)
above 100.55 (above yesterday’s high)
Target = 101.70 (Fibonacci
Stop = 100.10 (below the breakout level and yesterday’s
Notes = MDY has been showing relative strength and closed at a
new 52-week high yesterday. As such, there is virtually no overhead price
resistance to hold MDY down if it breaks above yesterday’s high. Of course, MDY
will be dependent on the strength or weakness of the overall broad market.
Remember that a full position of MDY is equal to only 100 shares (half of SPY),
based on the MTG
Position Sizing Model. Also, since MDY may gap open above its trigger
price, remember to use the MTG Opening
Gap Rules. This means we will only buy MDY if it trades above its 20-minute
opening high. This prevents us from getting trapped from buying a gap up
that may fail.
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
- OIH long (1/2 position from October 28) –
bought 55.15, sold 55.05,
points = (0.05), net P/L = ($3)
- OIH long (1/2 position from October 28) –
bought 55.15, new stop at
54.60 (see note below), unrealized points = (0.50), unrealized P/L =
Per intraday e-mail alert, we sold HALF our
position in OIH to reduce risk because it was not following through on the
previous day’s gains as we had expected. However, we kept half the position open
and have tightened the stop slightly. Since there is a good chance that OIH may
gap down this morning, we will be using the MTG Opening
Gap Rules. If OIH gaps down below our stop, we will adjust the stop to just
below the 5-minute low to protect against a gap down and rally. Remember that
you can follow $OXH.X, which is the index for OIH. Although OIH does not open
right away, the price action in $OXH.X is usually immediate.
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