Market Timing System Keeps Traders Out Of Trouble ($SPY, $DIA, $QQQ, $IWM, $MDY)

market timing model:

Sell – Signal generated on the close of October 12 (click here for more details)


today’s watchlist (potential trade entries):

today's watchlist
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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.

open position summary
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closed positions:

open position summary
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ETF position notes:

  • Note the changes to setups highlighted above.

stock position notes:

  • Note the reduced stop price in BIDU.


ETF and broad market commentary:

A positive start to the week ended with a rather negative finish, as stocks surrendered several days of gains and closed near their “swing lows” from the previous week. The major indices opened slightly lower, then steadily trended down throughout the entire session. The Dow Jones Industrial Average ($DJIA) plunged 1.5%, the S&P 500 Index ($SPX) tumbled 1.7%, and the Nasdaq Composite ($COMPX) careened to a 2.2% loss. The small-cap Russell 2000 Index ($RUT) and S&P Midcap 400 Index ($MID) fell 1.9% and 1.4% respectively. All the main stock market indexes closed near their lows of the day and their worst levels of the week.

Total volume in the NYSE was 2% higher than the previous day’s level, while volume in the Nasdaq ticked 9% higher. Although part of the increased trade was likely attributed to last Friday being monthly options expiration day, volume in both exchanges was well above 50-day average levels, and turnover in both the NYSE and Nasdaq was the highest we’ve seen since September 21. The higher volume across the board caused both the S&P and Nasdaq to register a bearish “distribution day” that was indicative of selling amongst banks, mutual funds, hedge funds, and other institutions. Market internals were flat out ugly as well, as declining volume slaughtered advancing volume by a margin of more than 8 to 1 in the NYSE. The Nasdaq ADV/DEC volume ratio was similarly negative by a margin of more than 5 to 1.

After the major indices began pulling back from their highs in late September, then subsequently bounced in the beginning of October, our disciplined, rule-based market timing system shifted from “confirmed buy” mode to “neutral” mode on October 5. This change in our market bias perfectly coincided with the peak of the bounce off the lows of late September. In “neutral” mode, we can be positioned either long or short, but position size of all new trade entries will be lighter than usual, in order to reduce risk. Also, our portfolio will be primarily (or fully) in cash, with only a few positions in either direction. As we entered into neutral mode on October 5, we exited all long positions in individual stocks and began focusing primarily on swing trading ETFs with a low correlation to the direction of the overall stock market (ie. currency, commodity, fixed income, and international ETFs). One week later, on October 12, the necessary signals were generated for a new “sell” signal (click here to review each of the five different modes of our timing model). The recent changes in our sentiment, based on our market timing system, are shown on the daily chart of the PowerShares QQQ Trust ($QQQ) below. Notice how the model is designed to keep you out of trouble when the going gets rough:

$SPY market timing

As broad market conditions have been eroding over the past month, we certainly hope subscribers of this newsletter have been following the signals of our market timing system. Subscribers who have been doing so should be quite happy now, as they would have been out of all long positions of individual stocks just a few days before last Friday’s big decline, thereby avoiding substantial losses and the pain that is certainly being felt by traditional “buy and hold” investors right now. While many subscribers to The Wagner Daily newsletter like to follow the exact entries and exits of our individual stock and ETF trade picks, there are also many traders and investors who subscribe merely for the benefit of knowing when to be in and out of the market, and how much exposure to assume, while trading their own trade picks and ideas. The accuracy of our market timing system alone is worth the price of the subscription many times over, especially when market conditions rapidly change, as has been the case over the past month.

Presently, we have three open ETF positions in our model ETF trading portfolio, each of which is showing an unrealized gain due to its low correlation to the direction of the broad market. US Natural Gas Fund ($UNG) is presently showing a 4.2% gain since our October 9 entry, FirstTrust Natural Gas Index ($FCG) is up 2.2% since entry, and our partial position of iShares Colombia Index ($GXG) is now trading 2.6% above our entry price. Since these ETFs have exhibited solid relative strength as the market sold off sharply over the past week, we anticipate further gains in the days ahead and will soon be raising our protective stops to lock in gains along the way.

If we enter any individual stocks right now, the trades will be on the short side. But with ETFs, we have the choice of being short, buying an inversely correlated “short ETF,” or simply trading ETFs that are not correlated to the direction of the broad market. The latter is what we are doing right now. In addition to our three open positions, notice there are two new ETFs on our watchlist for potential entry in the coming days ($FXE and $SIL long). The technical setups of both these potential trades were discussed in the October 19 issue of The Wagner Daily (subscribers may wish to log into the Members Area of our website and view the archive of past issues to review the setups). Both of these ETF trade setups ($FXE and $SIL long) are low-risk ways to profit from weak market conditions for traders who are unable to sell short if they have a non-marginable cash account (such as an IRA).

In the most recent issue of The Wagner Daily (October 19), we said, “We can’t expect much from the S&P 500 if the Nasdaq is not on board. Over the past few weeks, two key Nasdaq leadership stocks, GOOG and AAPL, have broken down below their 50-day moving averages. These leaders are being replaced this week by insurance and utility stocks….this is not the type of rotation that inspires confidence.” Given that AAPL declined another 3.7% in last Friday’s session, further deterioration in leading Nasdaq stocks indeed played a big role in the day’s sharp decline. We continue to expect further pressure on the broad market as long as leading tech stocks remain week. This week, all eyes will be on the quarterly earnings report of AAPL, which is due to trumpet its latest results on Thursday after the close.


stock commentary:

Friday’s heavy selling was ugly across the board, especially so in the Nasdaq, which has completely broken down the past few weeks and split the market in two. The Nasdaq Composite is well below the 50-day MA and gunning for the 200-day MA, while the S&P is still holding on to the 50-day MA (though probably not for long).

Our timing model has served us well the past few weeks. After operating on a buy signal through most of August and September, the model shifted into neutral by the close of October 5, which forced us to tighten up stops on remaining long positions (to near breakeven or higher if possible). By the close of October 9, we stopped out of all remaining positions in ARRY $-48, ONXX +$227 , AOL +$246, and NTE -$256, with a 100% cash position in the stock portfolio. After a few days on the sidelines and further deterioration in the broad market averages, the timing model generated a sell signal on the close of October 12. This signal prevents us from entering new long positions with any kind of serious commitment before a new buy signal is generated. Yes, we could have added some long exposure while on sell signal, but no more than 2-3 positions with 1/3 of normal share size. Our patience paid off, as the market stalled on October 18 and sold off sharply the following day.

With the timing model currently on a sell signal and the market under heavy selling pressure we are happy to be on the sidelines. The price action over the past few weeks has been tough to negotiate. I think the issues we had with our batting average in September (which at 45%-50% was well below the 65%-75% rate we normally see in a strong market) was a sign that perhaps the rally was not as healthy or robust as we would have hoped. This could also be a product of a market that has lost steam in 2012 after a 42 month advance off the lows of 2009.

Friday was pretty ugly and here are a few of the charts we noticed:

Strong stocks breaking down, one of which was AFFY:

$AFFY breaking down PATTERN

Stocks that we were monitoring for a potential buy point fell apart. ALGN was tightening up on the daily chart:

$PCRX breaking down PATTERN

And others….were just blown up!

$ALGN breaking down PATTERN

Our lone position, a short entry in BIDU on Friday was a disappointment. We had the right idea to get short but the stock selection did not cooperate. We lowered the stop in BIDU to just above Friday’s high, as we want the price action to fall apart or we are out with a small loss. BIDU may just decide to trade in a tight range until their next earnings report which is currently scheduled for Oct. 29.

If you are a new subscriber, please e-mail [email protected] 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.