The Wagner Daily – Russell 2000: Undercut Rally

The Wagner Daily – January 31, 2022

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MTG Market Timing Model –  SELL

Our timing model was designed to keep our trades in line with the prevailing market trend, not to call tops or catch bottoms in S&P 500 or Nasdaq Composite.

today’s watchlist (potential trade entries):

open positions:

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position notes:

• No trades triggered

Commentary:

Stocks closed out last week’s trading with bullish reversal action on the daily charts of broad market averages. The S&P 500 closed with a bullish outside day which occurs when the price undercuts the prior day’s low and trades above the prior day’s high. The close was also above the 5ma and 8-day EMA on the daily chart and above the 20-period EMA on the hourly. The strong afternoon action increased the odds of a short-term rally this week. As always, a break of Friday’s low within the next day or two would negate the bullish candle and suggest lower prices from here.

The Nasdaq held support and closed with a bullish outside day as well. A bounce to the 20-day EMA on the daily could be in play for both the S&P 500 and Nasdaq Composite.

An undercut and rally day for the Russell 2000 ETF $IWM. The undercut and rally occurs when the price undercuts a prior low intraday but closes back above. This sort of action can often spark a short-term counter-trend reversal, especially when the price is extended from the 20-day EMA.

The timing model remains on a sell signal with Monday now day 6 of a new rally attempt.

Given the bullish reversal action last Friday, the odds have increased for a short-term bounce in the market. If we were still short, then we’d likely cover at least 3/4 of the position if not all, and trail a tight stop on the rest.

Energy stocks are still sitting near highs and could be in play this week. Agriculture stocks ($CF $ADM) and shippers ($DAC $ZIM $GSL) are also strong.

$CF is not an official setup but can be purchased near Friday’s high looking for the price to hold the 8-day EMA. Stop can be placed beneath the 1/26 low.

When a counter-trend rally occurs, some of the biggest movers are in stocks off the lows that are extended from the 20-day EMA on the daily chart. These stocks can run 15-20% or more in a few days and potentially touch the 20-day EMA. These are not the type of setups we focus on in the report as we run a trend trading system, but they do have some value especially when market conditions for growth are ugly. $TASK, $ONEM, and $BSIG are a few examples of extended to the downside.

Unofficial Setups – For experienced traders only, no guidance is given for these setups.

• $CF – buy near 71.20 (don’t chase if it rockets higher)
• watching $ERX for a bull flag
• $BROS – buy at 49.70 (reversal off lows)

See you in the chat room,

Rick

For those new to this report, our share size is pretty conservative with max. size around 10% of equity per trade. We do this because we prefer to trade 10-12 names to keep the report active.  However, if your goal is to maximize returns, taking 18-25% positions is the way to go.   If trading in a non-margin account, this will limit the portfolio to 4-5 positions.  If on margin, then 8-10 positions. Our risk per trade on average is just over 1/2 of 1%. Experienced traders may want to risk 1% to 2% per trade.   For example, a 20% position in a 100k account with a 6% stop loss would result in a $1,200 loss (1.2%). 

This list is a good starting point for monitoring the health of the market for those who have limited time.

https://morpheustrading.com/services/swing-trade-alerts

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