After beginning the day with a small opening gap down, the major indices traded sideways, in a tight range, for the first four hours. Buyers stepped in around 1:30 pm EST and enabled both the S&P 500 and Nasdaq Composite to rally to new intraday highs. However, the buying interest was short-lived, and the major indices drifted back down during the final hour of the session. The end result was a nearly flat close by the S&P 500 and Dow Jones Industrial Average, which lost 0.1% and gained 0.1% respectively. The Nasdaq followed a similar pattern and closed 0.2% lower.
We closely followed yesterday’s volume patterns in an attempt to see what was happening beneath the service. When the major indices were trading lower throughout the first half of the day, volume in both the NYSE and Nasdaq was coming in well above the previous day’s levels. As of 12 noon EST, volume in the Nasdaq was coming in 22% higher than the previous day’s level at the same time of day. Because the index was trading in the red, this was bearish and indicated institutional distribution. When the afternoon rally began, volume began to dry up, and the volume in the Nasdaq closed the day only 11% higher than the previous day. This means that volume was heavier during the morning weakness, but decreased when the market rallied. This, of course, is never a positive sign for the bulls. Volume in the NYSE, which was 2% higher than the previous day, followed a similar intraday pattern.
Going into yesterday morning, we were focused on the fact that the major indices had closed the prior day right at support of their prior downtrend lines, which were broken only a few days prior. Because of this support level, we speculated that Tuesday’s closing prices presented us with a low-risk opportunity to enter new long positions in the broad market. As such, we bought QQQ (Nasdaq 100 Index) when it rallied above its high of the first twenty minutes yesterday. So far, the position is working okay because the said support level held up well yesterday. Looking at the daily chart below, notice how QQQ has held firmly at support of its prior downtrend line during the past several days. Conversely, the 20-day moving average is acting as overhead resistance:
If QQQ and the Nasdaq is going to follow through on last week’s breakout above its primary downtrend line, this is where it must happen. If the broad market does not rally from its current levels within the next one to two days, odds are good we will see a retest of the July lows in the broad market. However, being long right now still presents a very positive risk/reward ratio. If we are right about a follow-through rally, we have a price basis near the bottom of the range and will realize a large profit. But if we are wrong and the major indices fail to go anywhere, we can quickly close our long positions with a minimal loss. In the present market environment, one of the biggest determinants to your overall success is whether you are taking positions that present a firmly positive risk/reward ratio. Generally speaking, we look for the potential profit (reward) to be at least two to three times the actual points we will lose if stopped out (risk).
Today’s watch list:
There are no new trade setups for today, although we remain short half position of HHH, with a 2 point unrealized gain, and long QQQ, from yesterday’s entry.
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.
HHH short (HALF position, from Aug. 2) –
shorted 53.88, covered 51.83, points = + 2.05, net P/L = + $202
HHH short (HALF position, from Aug. 2) –
shorted 53.88, new stop 52.90, target 51.25, unrealized points = + 1.92, unrealized P/L = + $192
QQQ long (from Aug. 4) –
bought 34.24, stop 33.90, target 35.60, unrealized points = + 0.00, unrealized P/L = + $0
Per intraday e-mail alert, we covered half of the HHH short position into yesterday’s opening gap down, netting a 2 point gain. We still remain short the second half of the position, but with a tighter stop. We also bought QQQ yesterday, as per above.
Edited by Deron Wagner,
MTG Founder and