Following through on the strength of last Friday’s late-day rally, stocks scored a moderate round of gains yesterday, but considerably lighter turnover showed the “big money” remained on the sidelines. The Nasdaq Composite advanced 0.8%, the S&P 500 0.5%, and the Dow Jones Industrial Average 0.4%. The small-cap Russell 2000 showed relative strength with a 1.3% gain. The S&P Midcap 400 climbed 1.0%. All the main stock market indexes closed near the upper quarter of their intraday ranges.
Trading slowed across the board, as mutual funds, hedge funds, and other institutions laid low ahead of this afternoon’s Fed meeting. Total volume in the NYSE receded 17%, while volume in the Nasdaq fell 19% below the previous day’s level. In both exchanges, turnover was well below 50-day average levels. More notably, it was the lightest volume day of the year in the NYSE. The problem with extremely light volume advances in the stock market is many days of hard-earned gains can be easily undone by just one session of aggressive institutional selling. Therefore, prudent traders may especially view yesterday’s positive price action with a grain of salt.
In yesterday’s commentary, we discussed how the S&P and Nasdaq were at pivotal “make it or break it” levels on their daily charts. Specifically, the indices were testing major resistance of their June 2010 highs, while trying to hold above support of their 200-day moving averages, an important indicator of dominant trend. With yesterday’s price appreciation in the broad market, the S&P 500 finished above its prior closing high (August 4) by less than one point. It was a similar situation in the Nasdaq. Clearly, it did not qualify as a convincing breakout, especially given the pitiful volume levels. Therefore, the same technical situation analyzed in yesterday’s Wagner Daily remains going into today’s session.
One of the trading rules of this newsletter is none of our buy or sell orders for ETF trades ever go live until after the first five minutes of trading (9:35 am ET). The reason behind this rule is that ETFs (as well as stocks) sometimes print rogue opening trades that would otherwise cause positions to falsely trigger for entry, or hit their stops. Yesterday’s opening price action in Claymore Global Solar Energy (TAN) was a good example of this. The 5-minute intraday chart of TAN below illustrates this:
On yesterday’s open, exactly at 9:30 am ET, there were two trades that hit the tape, both for 600 shares at $8.45. But immediately thereafter, the next trades went off at $8.08, which could be considered the “real” opening price. If we didn’t have this rule, and our trigger price for buy entry would have been at $8.35, for example, our buy stop order would have immediately triggered on the open. However, because of our rule to always wait five minutes before honoring trigger or stop prices, there would have been no harm done yesterday. As it is, we were already long TAN, and the false opening prints were in our favor, but the example is relevant nonetheless.
We’ll spare the boring details of the various ways that false opening prints manage to happen in the first place, but suffice it to say one needs some type of rule to deal with this occasional situation. If one is a full-time trader, waiting for the first five minutes of trading before placing orders is quite simple. But even for traders and investors who are unable to actually monitor the market during the opening minutes, several brokerage firms offer “conditional orders” that allow one to place various constraints to orders being executed. One common type of conditional order is a “time conditional” order, which allows one to place an order, but it will be held on the brokerage firm’s server until a specified time of day. If we need to set physical stop orders before the open, we always use these “time conditional” orders. Just a little tip for those of you who’ve ever got triggered into a trade, or stopped out of one, that should not have happened.
Today, the Federal Open Market Committee (FOMC) is slated to release their latest statement on interest rates and economic policy at 2:15 pm ET. As always, be prepared for a great deal of volatility and whippy price action thereafter. Considering how light volume levels have been lately, volatility could be even greater than usual. As such, we will avoid any new trade entries today, and instead focus our energy on managing our current batch of open positions. Frankly, a decent “knee-jerk” pullback as an initial reaction to the Fed announcement would be positive, as it would provide us with a much better reward-risk ratio on a few ETFs we’ve been monitoring for potential long entry. Otherwise, we’re in no hurry to increase exposure directly in front of the Fed. After the market digests the announcement over the next one to two days, we’ll be back to pointing out fresh ETF trade setups to consider for entry.
| Open ETF positions:
Long – IDX, TLT, TAN, UNG, UUP |
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Deron Wagner is the Founder and Head Portfolio Manager of Morpheus Trading Group, a capital management and trader education firm launched in 2001. Wagner is the author of the best-selling book, Trading ETFs: Gaining An Edge With Technical Analysis (Bloomberg Press, August 2008), and also appears in the popular DVD video, Sector Trading Strategies (Marketplace Books, June 2002). He is also co-author of both The Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader (McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and Yahoo! FinanceVision. Wagner is a frequent guest speaker at various trading and financial conferences around the world, and can be reached by sending e-mail to deron@morpheustrading.com.
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