market timing model:

Buy – Signal generated on the close of November 23 (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:

• No changes to existing positions, and no new trades were entered.

stock position notes:

• No changes to existing positions, and no new trades were entered.

 

ETF and broad market commentary:

Stocks concluded the week with a mixed performance last Friday, as the Dow Jones Industrial Average ($DJIA) rose 0.6%, but the Nasdaq Composite ($COMPQ) fell 0.4%. The benchmark S&P 500 Index ($SPX) increased 0.3%, which was also the approximate gain in the small and mid-cap indices. It was the second time in three days that the the Dow and Nasdaq showed such sharp price divergence against each other. Turnover across the board was slightly lower than the previous day’s levels.

For the week, the Dow Jones gained 1.0% and the Nasdaq lost 1.1%, making for a rather sizeable weekly price divergence of more than 2% between the two popular stock market indexes. A significant part of the weakness in the Nasdaq could be blamed on the dismal performance of Apple ($AAPL), which plunged nearly 9% last week and closed back down near its mid-November low. Since $AAPL represents a 10% weighting in the Nasdaq, the stock has a tendency to lead the entire Nasdaq index. But as technical traders, the actual reason for the sudden “emergence of divergence” is largely irrelevant to us. Rather, it is more important to first be aware the divergence is simply taking place, then take that into consideration if entering any new positions in the coming days.

Below are the daily charts of $DIA and $QQQ, popular ETF proxies for the Dow Jones Industrial Average and Nasdaq 100 Index respectively. When comparing the prices of both ETFs in relation to their respective 20, 50, and 200-day moving averages, the substantial and increasing price divergence becomes easy to see:

On the first chart above, notice that last Friday’s gain enabled $DIA to close above key intermediate-term resistance of its 50-day moving average for the first time in nearly 2 months. $DIA is now trading firmly above both its 20 and 200-day moving averages as well.

Conversely, $QQQ reversed sharply lower after gapping to open at resistance of its 50-day moving average, which led the ETF to subsequently sliding back below both its 20 and 200-day moving averages as well. Put simply, the Dow is trading above support of the near, intermediate, and long-term moving averages we closely follow, while the Nasdaq is trading below resistance of the same three moving averages.

One simple way a short-term ETF swing trader could attempt to profit from the current divergence in the broad market is through buying $DIA and/or simultaneously selling short $QQQ. Doing so might position oneself to benefit from the mixed price action the main stock market indexes are currently showing. However, we have found from years of experience that swing trading often becomes more challenging in periods when such price divergence exists.

More specifically, we know that market conditions such as the present often leads to an increase in the number of erratic, whipsaw-like trading sessions, which are caused by an increasing tension in a match of tug-of-war between the bulls and bears. Therefore, rather than entering new ETF trades to attempt to profit from this divergence, our preferred plan of action is to merely focus on managing our existing open positions for maximum profitability and minimum risk. With regard to new swing trades, we are temporarily shifting into “SOH mode” (sitting on hands).

 

stock commentary:

Although our stock screening has produced some decent buy setups over the past two weeks, we simply haven’t seen the type of follow-through in bullish patterns that we normally associate with strong markets. As mentioned above, we prefer to lay low for a few days, and wait for another higher volume “accumulation day” in a major average. However, at this point, the odds of the stock market producing a powerful thrust to the upside are quite low. If doing any buying right now, one might strongly consider doing so with reduced share size. We have been sizing positions at 7 – 8% over the past few weeks (total equity value of the trade as a percentage of the cash value of our model portfolio), and we see no reason to increase exposure right now.

For more aggressive active traders, below are two potential buy setups for today. These setups are not “official,” and their results will not be tracked:

The first ticker, $OCN, is a potential buy entry with partial share size if it manages to clear its 50-day MA and the three-day high. $OCN is one of the best looking stocks in one of the strongest industry sectors in the market right now. Next, take a look at the daily chart pattern of $RMD:

$RMD has a very tight pattern that triggered a technical buy entry last Friday (December 7), but it failed to follow-through. If you missed that entry, a move above Friday’s high is a valid secondary buy entry point. Again, even our best stock picks and technical setups have not been working out to large gains lately, so we highly suggest keeping share size small if you decide to participate in these unofficial plays.

In addition to $OCN and $RMD, we are also watching $CRM, $RAX, $VMC, and $PRXL. But again, there are no new “official” trade entries right now due to the general lack of follow-through over the past two weeks.

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.