market timing model:

Neutral – Signal generated on the close of October 5 (click here for more details)

 

today’s watchlist (potential trade entries):

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open positions:

Below is an overview of all open positions, as well as a report on all positions that were closed only since the previous day’s newsletter. Net P/L figures are based on two separate $50,000 model portfolios (one for ETFs and one for stocks). Changes to open positions since the previous report are listed in pink shaded cells below. Be sure to read the Wagner Daily subscriber guide for important, automatic rules on trade entries and exits.

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closed positions:

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ETF position notes:

• GXG triggered its stop for half the remaining position. We now have 125 shares left.

stock position notes:

• No trades were made.

 

ETF and broad market commentary:

Stocks opened relatively flat yesterday, drifted lower throughout the first half of the session, then traded in a sideways range throughout the rest of the day. Building on the previous day’s weakness, all the major indices declined, but the losses were more moderate than the previous day. The Nasdaq Composite Index ($COMPX) fell 0.4%, the S&P 500 Index ($SPX) 0.6%, and the Dow Jones Industrial Average ($DJIA) 1.0%. Small and mid-cap stocks showed a bit of relative strength for a change, as these small-cap Russell 2000 Index ($RUT) edged 0.1% lower and the S&P Midcap 400 Index ($MID) slipped 0.5%. Like the previous day, all the main stock market indexes closed near their intraday lows.

Turnover rose moderately across the board, causing both the NYSE and Nasdaq to register another bearish “distribution day.” Total volume in the NYSE ticked 1% higher, while volume in the Nasdaq increased 9% above the previous day’s level. The price to volume relationship in the market has been becoming increasingly negative in recent weeks, just as yesterday’s session hinted at selling among banks, mutual funds, hedge funds, and others institutions. Nevertheless, market internals were not too bad. Between the NYSE and Nasdaq, declining volume exceeded advancing volume for the overall stock market by a margin of approximately 2 to 1.

After a an explosive 20% move off the lows, silver has formed a tight, month long base above the 20-day exponential moving average. We also like the dry up in volume during the consolidation on the daily chart of the ProShares Ultra Silver ETF ($AGQ) below. $AGQ will have also formed a higher low within the base if the recent pullback to the 20-day EMA holds. There is also a bullish trend reversal signal with the 50-day moving average recently crossing above the 200-day moving average (please reference $SLV to see the crossover). Also of note is the 200-day moving average, which is now beginning to slope higher over the past month. Our official buy entry is over the two-day high, which is above the bullish reversal candle of October 9.

We are already long the United States Natural Gas Fund ($UNG) from a low-risk point on October 9. For those who missed the initial entry it is possible to buy on strength if $UNG can clear the two-day high. Another possibility, which is the most conservative of all three entries, is to wait for the action to clear the swing high of October 2. Whether $UNG breaks out this week or sometime next week, the price and volume action has been bullish since it cleared the 200-day moving average in late September.

Our current portfolio holdings remain in pretty good shape. We have close to 20% short exposure with our position in $PSQ that is currently in the money from our entry early Wednesday morning. $UNG and $FCG are setting up for a potential move out. Our lone weak holding is $GXG, which we have already reduced down to a 5% position. We are in no rush to add long exposure, as the number of distribution days continue to mount in the Nasdaq Composite. Also, we note the weakness in $AAPL, which has been leading the market to the downside since stalling out in late September. It may be difficult for the Nasdaq to find traction if AAPL is unable to hold the low of the October 9 reversal candle.

 

stock commentary:

With the Nasdaq Composite currently in a four week correction that is 5% off the highs of the rally, traders may get the itch to do a little bottom fishing in strong stocks in hopes of catching the dead lows of a pullback. Rather than giving in to the urge to buy stocks with less than ideal pivot points, we prefer to sit in cash or turn our attention over to the ETF side in hopes of identifying quality buy setups that are not heavily correlated to the broad market (UNG or SLV).

The chart of ARRY below is a good example of how we limit losses quickly when the reward to risk ratios are no longer in our favor.

We bought ARRY on 10/4 knowing that market was beginning to show some warnings signs. Yes, we should have bought ARRY because we never know exactly when the market will crack, so as long as the market is in buy mode we have to take our shots. However, by the close of 10/5, we believed that the bounce off the lows in the market could give way to another leg down. So rather than hold ARRY down to the original stop we sold our position on the open of October 8. We also raised stops to breakeven or better in ONXX, AOL, and LNKD. Now, we may not be able to sell ALL open positions ahead of the stop and that is fine (we held NTE to the original stop). As long as we are cutting back our exposure and limiting losses on the majority of positions we should save a significant amount of money. The key to this type of risk management is to always engage the market and avoid getting lulled to sleep by the uptrend. At some point conditions do change, and we can no longer give the market the benefit of the doubt when holding a long position. It is at this point when the reward to risk ratios are no longer in our favor.

Our swing trading strategy remains in a 100% cash position. Conditions can and do change quickly, so do not be discouraged about the current action, as we could potentially shift back into buy mode sometime next week. As for now, we will continue to lay low until the setups improve and the market averages are able to gain some traction.

If you are a new subscriber, please e-mail rick@morpheustrading.com with any questions regarding our trading strategy, money management, or how to make the most out of this report.

 

relative strength combo watchlist:

Our Relative Strength Combo Watchlist makes it easy for subscribers to import data into their own scanning software, such as Tradestation, Interactive Brokers, and TC2000. This list is comprised of the strongest stocks (technically and fundamentally) in the market over the past six to 12 months. The scan is updated every Sunday, and this week’s RS Combo Watchlist can be downloaded by logging in to the Members Area of our web site.