Traders were indecisive and nervous ahead of last evening’s first major earnings reports as the major indices began yesterday with moderate strength in the morning, sold off to new intraday lows at mid-day, but rallied to new intraday highs into the close. Relative strength was found in the S&P 500 Index, which closed at its high of the week and within a fraction of its 52-week high that was set last week. Like the S&P 500, the Dow Jones Industrial Average also showed relative strength to the Nasdaq, which did not even have enough strength to close above its high of the previous day. The Dow Jones Industrial Average closed with a 1.1% gain yesterday, while the S&P 500 Index closed 0.8% higher. The Nasdaq Composite managed a 0.7% gain, which was small relative to its usual gains versus the S&P and Dow. Yesterday’s volume in both the NYSE and Nasdaq was slightly lower than the previous day, which is to be expected ahead of a major evening of corporate earnings.
Although the broad market closed the trading day with gains yesterday, it quickly turned ugly in the after-hours market, as reports from Intel and Yahoo! did little to impress traders. Excluding a 6 cent gain from a tax benefit, Intel beat earnings by 2 cents per share and also met quarterly revenue expectations. However, they also forecast a drop in revenue for the first quarter, which not only caused Intel to trade 2.5% lower in after-hours trading, but also dragged the post-market Nasdaq futures much lower. Yahoo! met earnings expectations, but did not exceed them, and also guided on the low end of consensus estimates for the next quarter. This further added to the weakness in the Nasdaq and also caused Yahoo! to trade more than 4% below its closing price of $48.39. Earnings reports from other heavyweights such as AAPL, DNA, and QLGC did little to support the weakness in the Nasdaq futures. Are we surprised by this? Not at all! If you have been paying attention to our commentary regarding earnings reports over the past several days, you will recall that we anticipated seeing post-earnings report weakness UNLESS the reports were absolutely stellar, which they have not been (so far). What we saw in the after-hours market yesterday was a classic case of “buy the rumor, sell the news,” which means that traders have been buying the market in anticipation of good earnings reports, but were selling once those reports were actually released. The large rally we have seen in most shares over the past several months has already priced in positive quarterly earnings, so it typically takes a stellar report in order to NOT see selling after the companies report. Kudos to those of you who locked in gains on your long positions before last evening’s earnings reports.
Though many newsletters and advisory services tout their winners, only a small percentage talk about their losing trades. Perhaps this is due to ego or they simply feel it will hurt their marketing efforts. However, given the reality that approximately 40% of trades result in net losses, I personally feel there is a lot of educational value in discussing why a particular trade did not produce the desired results. Remember that consistently profitable results, as Morpheus has generated over the years, are typically achieved through maximizing the profits from the winning trades while quickly closing the losing ones. It is NOT due to picking the right stocks an incredibly high percentage of the time. That being said, let’s discuss our recent trade in SPY, which we shorted on January 13 and stopped out of with a loss yesterday (January 14). Take a look at the hourly chart of SPY, which we have annotated for you below. A text explanation of the trade follows in the next paragraph:
As you may recall, we originally shorted SPY when it broke below support of its 40-period moving average on January 13, which had formerly been intact as support since December 12. Therefore, a break of that level was likely to trigger sell stop orders and result in lower prices in SPY. When entering the trade, we set our stop just above the previous day’s high of 113.24 because the previous day’s high and low prices always tend to act as support or resistance the next day. Therefore, if SPY broke below its moving average support, but managed to rally back above the previous day’s high, the short setup was no longer valid because it would represent a “higher high,” which is not what you want to see if you are short. Yesterday, January 14, SPY gapped up ABOVE the moving average convergence at 112.79, which should have acted as resistance. However, since the move occurred in the form of an opening gap, there is not much you can do about it. The moving average convergence held as support, as you can see, and propelled SPY above the January 12 high, and hence our stop price, during the late afternoon. At that point, you need to cut your losses because there is no resistance left and SPY can go much higher. So, we simply stuck to the plan and took the loss. When we have a valid reason for entering a trade and we have logical stop placement, but the trade just doesn’t work out, we don’t care! We realize that, over time, we have a mathematical edge and trading is really just a numbers game that exploits that edge. Therefore, we don’t worry about whether each individual trade is a winner or loser. Rather, we simply stick to the plan and have confidence that it will continue generating profitable results for us, as it has always done.
With last evening’s weakness in the Nasdaq futures, keep an eye on the 5-day low of QQQ, which is at 37.60. If QQQ gaps down below that level, you may consider shorting it because it would trap the bulls who bought the past 5-days. However, if QQQ trades back up above that level, you should keep your stop tight in case the breakdown fails. As for shorting SPY or DIA, I would not mess with either of them right now UNLESS you are taking a longer term position, as we have done with the DIA short.
IBM, which suddenly moved their earnings release from next Tuesday to this morning, reported Q4 earnings of $1.56 per share, which was $0.06 better than the consensus of $1.50. Revenues rose 9.4% to $25.91 bln vs the $25.06 bln consensus. So far, IBM is bid higher in the pre-market, so perhaps this will counterbalance the negativity we saw from Intel, Yahoo!, and others last evening. Either way, we expect corporate earnings reports to remain traders’ primary focus, at least for the next two weeks. Continue to pay close attention to not the actual earnings reports, but the market’s REACTION to the reports the following day. There’s a good chance that the market’s reaction to these corporate earnings reports over the next several weeks will set the overall tone and direction of the broad market for the next several months. Our advice for the next several weeks is to tread lightly on both sides of the market until more earnings reports are released and digested.
Today’s watch list:
PPH – Pharmaceutical HOLDR
Trigger = above 80.15 (above yesterday’s high)
Target = 81.70 (retest of prior high from January 8)
Stop = 79.60 (below the 20/40 MA convergence on 15 min. chart)
Notes = PPH reversed just above its 20-day MA yesterday, after correcting for five days, while in the context of a primary uptrend. We anticipate further upside and at least a retest of the prior high. However, remember to use the MTG Opening Gap Rules. If PPH gaps up to open above its trigger price, we will only buy if it rallies to a new high after 20 minutes of trading. Otherwise, the gap could 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 (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.
- SPY short (from Jan. 13) –
shorted 112.46, covered 113.30, points = (0.84), net P/L = ($174)
DIA short (full position, from Jan. 6 and Jan. 9) –
shorted 105.27 (avg.), stop 107.55, target 100.50, unrealized points = (0.40), unrealized P/L = ($80)
SPY was stopped out yesterday. Please see the commentary above for full explanation of this trade. We remain short DIA.
Founder and President