Trade With The Odds In Your Favor (GLD, SPY, DIA, IWM, QQQ)
Stocks slid moderately lower on Monday on light trade. All five major indices closed in the bottom third of their respective trading ranges. The small-cap Russell 2000 (NYSEARCA: IWM) led the move lower as it fell 1.6% on the session. The S&P MidCap 400 dropped 1.1% while the S&P 500 (NYSEARCA: SPY) lost 1.0%. The Nasdaq (NASDAQ:QQQ) and the Dow Jones Industrial Average (NYSEARCA:DIA) showed the most resiliency as they shed 0.8% and 0.6% respectively.
Market internals ended the day mixed for a third consecutive day. Volume was considerably lower across the board as it fell by 12.6% on the Nasdaq and by 11.2% on the Big Board. Declining volume topped advancing volume by a ratio of 5.7 to 1 on the NYSE and by a factor of 3.3 to 1 on the Nasdaq. Monday’s price and volume action point to an absence of institutional participation in the selloff. Consequently, we would not categorize Monday as a distribution day in the market.
The SPDR Gold Trust ETF (NYSEARCA: GLD) has recently reclaimed support of its 20-day and 50-day moving averages. Further, GLD has now begun consolidating above these key marks. Ideally we would like to see GLD pull back and set a higher low by undercutting the 20-day EMA. This type of price action would help to form a base for the next move higher. Alternatively, a move above the two day high of $174.05 could present a buying opportunity.
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For those of you new to the newsletter, you may have noticed that we haven’t put many trades on lately and that commentary has been fairly light in the morning chat sessions. This is not always the case. However, when market conditions are not conducive to trading we don’t trade. Our methodology is rules based and requires that both the proper market conditions and specific trade setups are present before entering trades. Further, each trade must present at least a 2 to 1 risk/reward ratio. In order to make money in trading, the odds must be favorable. Otherwise, your trading success rate would have to be unrealistically high. Only 55% to 60% of our trades are successful, yet our newsletter returns have been impressive because of our strict trade entry and risk/reward requirements. We refer to this as the “math behind the trade”.
The commentary above is an abbreviated version of our daily ETF trading newsletter, The Wagner Daily. Subscribers to the full version receive specific ETF trade setups with detailed trigger, stop, and target prices, as well as daily updates on all open positions. Intraday Trade Alerts are also sent via e-mail and/or text message, on as-needed basis. For your free 1-month trial to the full version of The Wagner Daily, or to learn about our other services, please visit morpheustrading.com.
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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