Commentary:
The major indices spent the first half of yesterday trading in a narrow, sideways range, exhibited the usual post-Fed volatility, then closed near unchanged levels. At 2:15 pm EST, the Federal Reserve announced a quarter-point increase in the Federal Funds rate, the eighth consecutive increase, bringing the new rate to 3.0%. Despite volatile post-Fed swings in both directions, the broad market closed near the flat line. The Nasdaq Composite managed a 0.2% gain on volume that was 17% higher than the previous day. However, it’s relevant to note that most of the volume increase was due to the typical surge that occurs after an FOMC announcement. The Dow Jones Industrial Average registered a similar gain of 0.1%, but the S&P 500 closed 0.1% lower. Total market volume in the NYSE increased by only 7%.
Because yesterday’s action was directly tied to anticipation and the subsequent knee-jerk reaction of the Fed announcement, it’s fair to say that nothing really changed on a technical level. Shortly after the interest rate increase announcement, the S&P 500 rallied three points above the pivotal 1,163 resistance level we have been discussing, but it promptly dropped back down and closed the day at 1,161. Interestingly, yesterday’s low in the S&P 500 was support of the 200-day MA, but the high was resistance of its daily downtrend line:
Yesterday’s intraday spike above the 1,163 level resulted in a lot of stops being hit from traders who were short the S&P, but we remain short SPY. The fast surge up to the 1,166 level was a prime example of why we always place our stops far enough above the obvious resistance levels so that our protective stops are not prematurely hit on a breakout that fails. Reducing your share size while simultaneously using looser stops is always a wise idea in a volatile and indecisive market. Even if using looser stops, the reduction in your average share size compensates to prevent you from taking on more than your usual risk.
After yesterday’s Fed announcement, the Dow Jones Industrials also spiked higher and briefly traded above resistance of its daily downtrend line, but it came back down and closed below it. The daily chart below shows how the downtrend line perfectly acted as resistance on the Dow:
On an industry sector basis, the HOLDR ETFs for Biotech (BBH) and Pharmaceutical (PPH) both continue to show relative strength to the broad market. We bought BBH last month and sold for a 10-point gain when it hit our trailing stop last month. Since then, it has corrected and now appears poised to once again break out to a new high. Ever since breaking out above its downtrend line four weeks ago, PPH has also been consolidating nicely on its weekly chart:
We bought PPH on April 7 at a price of 72.80 and remain long the position with an unrealized gain of nearly 3 points. We will continue to trail a stop to maximize profits on this position. Note that we also remain short several stocks in the U.S. Home Construction Index ($DJUSHB), which remains in a downtrend on its daily chart and is showing resistance of its prior uptrend line on its weekly chart. Finally, we still like the Banking Sector ($BKX) on the short side as well, but only with a longer-term time horizon of at least several weeks.
Today’s watch list:
As we now have three open positions (DIA and SPY short, PPH long), there are no new trade setups for today.
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:
-
PPH long (from April 7) –
bought 72.80, stop 73.35, target 77.60, unrealized points = + 2.70, unrealized P/L = + $270
DIA short (from April 26) –
short 101.96, new split stop- HALF at 103.10, HALF at 103.90, target 97.10, unrealized points = (0.93), unrealized P/L = ($186)
SPY short (from April 20) –
short 114.72, stop 117.25, target 109.20, unrealized points = (1.88), unrealized P/L = ($376)
Notes:
No changes to the open positions.
Edited by Deron Wagner,
MTG Founder and
President