Commentary:

The
major indices finally began breaking out of last week’s narrow and choppy range
as the broad market tested the lower channel support of last week’s lows. For
the first time in weeks, the major indices trended steadily throughout the whole
day by setting an intraday series of lower highs and lower lows from the time
the market opened until it closed. This resulted in a modest loss of
approximately 0.5% for both the S&P 500 and Dow Jones Industrials, but a
loss of 1.5% for the Nasdaq. Just about every market sector showed losses
yesterday, but Semiconductors (SMH) and Biotechs (BBH) led the way lower.
Declining volume in the broad market outpaced advancing volume by a margin of
approximately 2 to 1, but total market volume came in lower than the previous
day. Therefore, yesterday was not technically a “distribution day” because the
market closed lower, but also on lower volume.

Yesterday’s smooth and
steady intraday trend was a refreshing change for traders who have become
accustomed to the market’s recent indecision and erratic behavior, failed
breakouts/breakdowns, and intraday reversals. Trending days such as yesterday
are ideal for traders, such as ourselves, who prefer to enter a trade in the
beginning of the day and simply trail stops to lock in and maximize profits
throughout the remainder of the day. As such, yesterday’s steady intraday trend
enabled us to profit from 5 out of 5 trades we entered in the Intraday Real-Time
Room yesterday. Conversely, choppy and indecisive days that have recently
plagued the market do not afford us the luxury of trailing stops and we instead
are forced to take profits quickly or face a reversal. Although most traditional
investors would have preferred to see the market break higher out of last week’s
range rather than lower, professional short-term traders generally don’t care
which way the market goes, just as long as it trends. The ability to sell short
on downtrending days enables us to equally engage in downtrending markets just
as much as uptrending ones. It’s only the range-bound and choppy days that
present a great challenge and higher degree of risk.

One of the best,
yet most basic, types of technical analysis you can use on trending days is
moving averages. On choppy and narrow-range days, moving averages usually do not
work to well because they continually cross back and forth over each other and
often do not provide any meaningful signals. However, moving averages often work
great at predicting support and resistance levels on both up and downtrending
days. Every trader has his/her own preference for which time intervals they
prefer to follow throughout the day and many of those intervals work equally
well. But, I personally track the following moving averages on the following
charts:

15-minute chart – 20, 40, 200-period moving averages
Hourly
chart – 20, 40, 200-period moving averages
Daily chart – 20, 50, 200-period
moving averages
Weekly chart – 10, 20, 50, 200-period moving averages

I won’t bore you with the details of why I chose those time intervals,
but suffice it to say that the combination of the above moving averages will
usually show you specific points of support and resistance on trending days. To
illustrate this, I have annotated a couple charts from yesterday in which the
above moving averages perfectly acted as support or resistance. We will start
with a 15-minute chart of QQQ (Nasdaq-100 Index):

As you can see, QQQ initially dropped quickly yesterday morning, but
then traded sideways, correcting by time throughout the mid-afternoon, until it
ran into the 20-period moving average. At that point, the 20-MA acted perfectly
as resistance and eventually pushed QQQ to a new intraday low. Even if you
missed the first selloff in the morning, you could have sold short during the
mid-afternoon consolidation and placed your stop order just above the 20-MA on
the 15 minute chart because that level often pushes indexes lower or higher on
trending days. Next we will take a look at a 15-minute chart of the SOX
(Semiconductor Index):

Notice how the SOX index sold off sharply in the morning, but later
found mild support at its 200-period moving average on the 15-minute chart.
Since a longer moving average period always provides more solid support or
resistance than a shorter time interval, the 200-MA is typically one of the most
powerful moving averages on any chart time frame. Very rarely will a stock or
index break through a 200-MA without first stopping or bouncing off of it. In
the case of the SOX, which was very weak yesterday, the index did not bounce off
the 200-MA, but it did ride along the top of it for several hours before
breaking below. If you were long and did not want to be, you could have placed
your stop order below the 200-MA because notice how the SOX was unable to get
back above the 200-MA once it broke below it. Finally, let’s take a look at the
daily charts of the three major broad-based ETFs (SPY, DIA, and QQQ), each of
which have one important thing in common:

Did you notice what each of the above charts have in common? Each one
closed within pennies of (either just above or below) its 20-day moving average.
Needless to say, the main support/resistance level to watch going into today
will be these 20-day moving averages on the major indices. The indices could
easily bounce off of these 20-day MAs and correct from the 2-day selloff or they
could just as easily gap down below their 20-day MAs, which would create
overhead resistance. The key is to wait for the first thirty minutes of trading
to have passed because the direction of the first thirty minutes will usually
set the tone for the remainder of the day. We may see a tradeable bounce off
these 20-day moving averages, but expect the market to quickly head down to the
50-day MAs if the indices are unable to hold above their 20-day MAs today. We’ll
analyze the rest of the week in tomorrow’s newsletter, based on how the indices
react to the resepective tests of their 20-day MAs.

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Today’s watch list:

(There are no
new plays for today, as we will instead focus on managing the two open positions
from yesterday, which are listed below.)

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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 Model.

Closed Positions:

(none)

Open Positions:

ONEQ short (from Nov. 10) –
shorted 78.28, new stop 78.85, target 76.90,
unrealized points = + 0.66, unrealized P/L = + $132

DIA short
(from Nov. 10) –
shorted 97.75, stop 98.50, target 96.30, unrealized points
= (0.08), unrealized P/L = ($16)

Notes:

Per
intraday e-mail alert, we shorted ONEQ yesterday afternoon for a swing trade and
have set new stops and targets listed above. We also shorted DIA when it
triggered yesterday. We will e-mail you any updates or changes to the above
positions.

Edited by Deron Wagner,
MTG Founder and President