Commentary:
The broad market spent the first half of yesterday following through on the heels of the previous afternoon’s strength, but the rally lost its momentum and the major indices drifted lower during the latter half of the day. The Nasdaq Composite, the strongest of the broad-based indices yesterday, showed a gain of 1.1% at its intraday peak, but closed only 0.7% higher. The morning rallies in both the S&P 500 and Dow Jones Industrials fizzled out even more in the afternoon, resulting in a 0.2% gain and 0.1% loss respectively. For those who were not trading the full day yesterday, it is noteworthy to point out that a big part of the reason the morning rally lost its momentum can be attributed to a terrorist scare that freaked out the market around 1:10 pm EST. At that time, some vague news hit the wires that “mass casualties” and sickness was reported at an office building in Washington, DC. Although details were sketchy, the broad market immediately sold off very sharply from near its intraday highs, down to negative territory. Several minutes later, it became clear there were not any casualties, and the sickness was simply the result of pepper spray that someone released as a “prank.” The markets recovered most of their losses shortly thereafter, but there was too much overhead supply created from the sudden drop. As such, the major indices spent the rest of the day chopping around in a range instead of resuming the previous rally. Below is an intraday chart of QQQ (Nasdaq 100 Index) that illustrates yesterday’s wild price action:
Without a doubt, the sudden intraday drop triggered a vast quantity of stop orders of traders who did not expect such a dramatic reversal. This is evidenced by the volume spike on QQQ, as illustrated above. Fortunately, swing traders typically have looser stops than day traders, so we simply rode out the gyration in our QQQ long position because it did not hit our original stop price of 33.65. By day’s end, we were back to sitting on an unrealized gain in the position. Regardless, yesterday’s action was a good reminder to everyone that, in trading, anything can happen and at any time! No matter how much you like a particular trade setup, the failure to always use stops can be devastating if major, unexpected news hits the markets.
Volume in the NYSE was about the same as the previous day, but volume in the Nasdaq increased by 9%. Because the Nasdaq closed with a gain and on higher volume, yesterday was technically a bullish “accumulation day.” Even more significant is the fact that the morning rally occurred on much higher volume than did the afternoon weakness, which was probably the result of shaken nerves from the mid-day cliff diving routine. After the first hour of trading yesterday, the Nasdaq had rallied more than 1% from the previous day’s close and volume was on pace to exceed the previous day’s level by a whopping 53%! Throughout the remainder of the day, the Nasdaq generally drifted lower, but volume also declined correspondingly. By day’s end, volume was only 9% higher than the previous day, but this was bullish because it meant that the selling occurred on much. This is the primary reason we remain moderately bullish going into today.
The resistance level of the August 27 high, which we spoke of in yesterday’s newsletter, perfectly coincided with yesterday’s high in the S&P 500. If not for the mid-afternoon landslide, there probably would have been enough volume and momentum to push through the resistance, but it was not to be. Therefore, this same resistance level becomes even more significant as we enter today. Take a look:
We would be pretty confident on the long side if the S&P closes above that 1,109 resistance level today, but rather cautious if it does not. The same goes for both the Dow Jones Industrials and the Nasdaq Composite, both of which also ran into resistance of their August 27 highs.
Today’s watch list:
There are no new trade setups for today, although we remain long QQQ.
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.
Closed Positions:
-
(none)
Open Positions:
-
QQQ long (from Sept. 1) –
bought 34.07, stop 33.65, target 35.10, unrealized points = + 0.20, unrealized P/L = + $80
Notes:
We are long QQQ, per yesterday’s entry.
Edited by Deron Wagner,
MTG Founder and
President