Commentary:

The broad market began yesterday morning with a large opening gap down, but quickly found support and spent the remainder of the day crawling steadily higher. The S&P 500 Index and Nasdaq Composite both closed with 0.2% losses, while the Dow Jones Industrial Average closed flat. However, each of the major indices closed near their intraday highs and recovered quite sharply from earlier losses. The Nasdaq, for example, was trading 1.3% at its morning low, so the closing loss of only 0.2% was mild in comparison. The closely-watched Semiconductor Index dropped 1.3%, but again found support at convergence of its 50-day moving average and its primary uptrend line from its September low.

Volume in the NYSE increased by 27%, while volume in the Nasdaq was 20% higher than the previous day. Because the major indices closed lower AND on higher volume, yesterday was technically a bearish “distribution day” in the broad market. However, considering that each of the major indices trended higher throughout the day and eventually closed near their intraday highs, it is probably not accurate to view yesterday as a day of heavy institutional selling. Although the volume increases were significant, bear in mind that volume was well below average the previous day due to the Columbus Day holiday.

The S&P 500 was looking pretty ugly in the beginning of the day, but the index perfectly found support at the lower channel of its uptrend, which began with the low of August 13. This enabled the index to quickly reverse its opening weakness and also to close back above its 200-day MA, of which it only traded below on an intraday basis. The daily chart below illustrates how the S&P bounced neatly off support of its intermediate-term uptrend line:

Because the index held support on the test of its uptrend line yesterday, this is obviously bullish and presents a low-risk entry point for new long positions. If you take a new long position in SPY (S&P 500 Index), you could simply place your stop below yesterday’s low, which would also represent a break of the uptrend line. As long as SPY holds above yesterday’s low, you could continue trailing a stop higher over the next several days. When a stock or index is in a steady uptrend on its daily chart, one of the best, yet most simple, plays to make is to buy any pullback to the trendline. In doing so, you create a very positive risk/reward ratio because your potential reward (profit) is much higher than the potential risk (loss). In this case, the potential upside, assuming the trendline remains intact, is many times greater than the potential downside if you place your stop just below yesterday’s low. It’s an elementary concept, yet is one that many traders, even experienced ones, sometimes lose sight of.

For the second consecutive day, the Semiconductor Index ($SOX) also found support at its primary uptrend line and closed above its 50-day moving average. The $SOX probed below the trendline on an intraday basis, but closed above it. When this occurs, it is usually bullish because the probe shakes out the “weak hands,” which frees the index of supply and enables it to resume its uptrend with less overhead:

The big news yesterday, of course, was the quarterly earnings reports from Intel and Yahoo! after the close. Upon announcing their results, both companies were higher in after-hours trading, although Intel was much higher than Yahoo! on a percentage basis. The after-hours bias on big earnings days often follows through into the next morning, so we are prepared for an overall bullish bias coming into today, especially in the $SOX index. When combined with the fact that both the S&P and $SOX bounced off their daily uptrend lines yesterday, the bullish bias from the earnings reports could be just the right impetus necessary to enable the broad market to resume its two-month uptrend.

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Today’s watch list:

There are no new plays for today. As the market is gapping up sharply higher, we want to be sure the gap will hold before entering new long positions. We will, however, send an e-mail alert if/when we enter new swing ETFs.

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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 (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:

HHH short (from Oct. 12) –
shorted 59.72, stop 61.20, target 57.15, unrealized points = (0.79), unrealized P/L = ($158)

Notes:

We shorted HHH per yesterday’s trigger price. It is gapping up in the pre-market due to Yahoo! strength, but remember to use the MTG Opening Gap Rules to manage the position. If it gaps open above the stop price, we mark the high of the first 20 minutes and adjust our stop to just above that level.

Edited by Deron Wagner,
MTG Founder and
President