Stocks gapped significantly higher on yesterday’s open, then built on their gains ahead of the Federal Reserve Board’s afternoon announcement on interest rates and economic policy. The aggressive three-quarter point rate cut initially sent shares to new intraday lows, but they zoomed higher only minutes later. The major indices thereafter rocketed to their best levels of the day in the final hour of trading. Exceeding their impressive gains of March 11, the S&P 500 and Nasdaq Composite scored identical gains of 4.2%. The Dow Jones Industrial Average climbed 3.5%. The small-cap Russell 2000 raced 4.8% higher, as the S&P Midcap 400 cruised to a 4.0% gain. The main stock market indexes closed at their absolute best levels of the session.
Despite yesterday’s monstrous gains, higher turnover failed to accompany the rally. Total volume in the NYSE declined 6%, while volume in the Nasdaq was on par with the previous day’s level. Curiously, volume in the Nasdaq failed to even exceed 50-day average levels. This tells us mutual, hedge, and pension funds remained cautious. Had institutional buying been heavy, trading would have surged well above Monday’s levels. Nevertheless, market internals were extremely strong. In the NYSE, advancing volume clobbered declining volume by a margin of 19 to 1. The Nasdaq ratio was positive by 11 to 1. 2,843 stocks in the NYSE advanced, while just 384 declined.
On a technical level, the most notable factor of yesterday’s action was the Nasdaq 100’s close above its 20-day exponential moving average for the first time this year. After last Thursday’s bullish intraday reversal, the index gapped up to open above its 20-day EMA on Friday. We were well positioned to capitalize on the anticipated upside follow-through, as we had bought the ProShares Ultra QQQ (QLD) on Thursday. However, stocks swiftly fell apart when the Bear Stearns news hit the wires on Friday’s open. We subsequently stopped out of our QLD position on Monday. But even though we realized a loss on our QLD position, we confidently re-entered the trade yesterday, when the Nasdaq moved back above its 20-day EMA. On the daily chart of QLD below, notice how it closed above its 20-day EMA for the first time since December 28:
One of the most psychologically difficult things for many traders to do, including ourselves, is to re-enter a position they just stopped out of, especially if doing so at a much higher price. Yet, the ability to do so often leads to some of the most profitable trades. Despite the realized loss from last Thursday’s entry into QLD, we were not afraid to re-enter it yesterday, even at a much higher price. After all the “weak hands” are shaken out of a good trade setup, the stock or ETF will often rip in the originally intended direction. In this case, the “undercut” of the March 10 low that occurred on March 17 is actually bullish because all the waivering traders and investors who were nervous about holding are now gone. This decreases the amount of overhead supply the position must overcome in order to move higher. On the chart above, the dotted horizontal line illustrates the “shakeout” and bullish reversal above the 20-day EMA.
Though one cannot be afraid to re-enter trades that just stopped out, the one key point of the strategy is the setups must still be technically valid! If an objective analysis of the trade setup no longer shows a technical reason for entry, then a re-entry is merely akin to “revenge trading.” Clearly, this is not a path you want to go down. But as long as you would still enter the trade if you never entered the first time around, re-entries are not a problem. Even if you need to pay up a point or two above your original exit price, netting three points out of a potential five-point gain is still better than gaining nothing at all. If you’re a new trader, gaining the confidence to re-enter trades, even at a much higher price, is one of the best things you can do for yourself. Further, this is actually a necessity in choppy or whippy markets. So far, yesterday’s re-entry in QLD is showing an unrealized gain of nearly 1.5 points.
Because of the Nasdaq’s closing price above the 20-day EMA for the first time in nearly three months, as well as the Dow’s close above its 50-day MA, we are now cautiously bullish on the near-term direction of the broad market. All bounce attempts that resulted from recent Fed rate cuts have been short-lived, but there are enough technical reasons to believe this one may be more substantial. Nevertheless, it’s too early to predict how long the bounce will last, especially with continued anxiety in the financial sector. Even though we’re now more focused on the long side of the market than the short side, we’re still in a news-driven environment. Stay alert and ready to reverse course (or go to cash) at a moment’s notice.
There are no new setups in the pre-market today. As always, we will promptly send an Intraday Trade Alert if/when we enter anything new.
Daily Performance Report:
Below is an overview of all open positions, as well as a performance report on all positions that were closed only since the previous day’s newsletter. Net P/L figures are based on the $50,000 Wagner Daily model account size. Changes to open positions since the previous report are listed in red text below:
Open positions (coming into today):
QLD long (200 shares from March 18 entry) – bought 67.70, stop 64.58, target 74.82, unrealized points = + 1.45, unrealized P/L = + $290
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
The DUG setup never triggered, even with our adjusted entry price that we sent via Intraday Trade Alert. For now, the DUG setup has been removed from our watchlist. We did, however, buy QLD per Intraday Trade Alert when it broke out in the late afternoon.
Edited by Deron Wagner,
MTG Founder and