Market Uptrend In Danger Of Reversing ($SPY)

market timing model:

Buy Mode
– Timing model generated buy signal on close of March 5 (click here for more details)

today’s watchlist (potential trade entries):

$todays watchlist
Having trouble seeing the open positions graphic above? Click here to view it directly on your web browser instead.

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.

Having trouble seeing the open positions graphic above? Click here to view it directly on your web browser instead.

closed positions:

open position summary
Having trouble seeing the closed positions graphic above? Click here to view it directly on your web browser instead.

ETF position notes:

  • We are selling roughly 1/3 of open long positions on the open. See instructions at the bottom of today’s report.
  • $ITB long entry triggered. We are cancelling the $IHI setup.

stock position notes:

  • We are selling roughly 1/3 of open long positions on the open. See instructions at the bottom of today’s report.
  • $DHI and $DK long entries triggered. We are cancelling the $TGH setup.

ETF, stock, and broad market commentary:

Please see updates to positions at bottom of commentary

Stocks sold off across the board yesterday, causing each of the main stock market indexes to slide approximately 0.8% lower. Turnover was 4% lighter on the NYSE, but total volume in the NASDAQ ticked 6% higher than the previous day’s level. This caused the NASDAQ composite to register another bearish “distribution day,” which is indicative of selling amongst mutual funds, banks, hedge funds, and other institutions.

Yesterday was the fourth such day of higher volume selling in the NASDAQ in recent weeks. Generally, a healthy rally will be derailed if either the S&P or NASDAQ suffer five or more distribution days within a one-month period. Nevertheless, bear in mind that the NASDAQ has been a laggard throughout the broad market’s recent advance to new highs.

Ever since our market timing model shifted into a new “buy” signal on March 5, we have not been pleased with the overall price action of the stock market. With the exception of one day, the entire rally to new highs has been unconfirmed by the presence of higher volume over the past several weeks.

Since our model for timing the stock market is rule-based and proven to consistently work over the long-term, we have simply been following it. But why would we be in “buy” mode if volume failed to confirm this month’s breakout to new highs for the major indices? The answer is simple. Price action is always king, while volume is queen. Although we need to see the confirmation of higher volume in order for breakouts to be confirmed, we also cannot sit back and watch the stock market move to new highs without us in it.

As you know, we have been selectively buying stocks and ETFs with relative strength to the broad market. Unfortunately, most of these positions have not moved higher. But on the other hand, they haven’t fallen much either.

We are not afraid to admit that our stock and ETF picks have been in a losing streak lately, but it isn’t the first time, and certainly won’t be the last. Just take a look at our historical performance statistics (which will be updated very soon), and you will see that we have had losing quarters, but our trading system has still easily outperformed a long-term “buy-and-hold” strategy since 2002 (using the S&P 500 Index as a proxy).

You may be disappointed that we haven’t had any winning trades for a while (obviously, so are we), but this is simply part of the business of trading. Rather than crying about it, we simply cut the loss quickly and move on to the next trade. In good times, the portfolio bangs out consistent profits time and time again (like it did throughout most of last month). However, since we have been getting mixed signals from the broad, and leading stocks have been failing to gain much headway, we must adapt by lowering our risk.

In market environments such as the present, we lower risk in one of two ways. First, we intentionally size the positions so that each new swing trade entry is significantly lighter than than our maximum risk parameter of $500 per trade (based on our model portfolios). The other option is to not assume much overall risk exposure in the portfolio. We have been doing both of these things ever since the March 5 buy signal; nearly every trade entry has been around 50% of maximum risk per trade, and we’ve also not been exceeding more than about 40% of the model portfolio’s cash value.

Modeling our swing trading portfolio in the way described above positioned us to benefit if the market moved higher, but still limited our risk if stocks suddenly moved lower and the recent breakout failed (which wouldn’t be surprising given the lack of volume confirmation).

Over the next few days, we will be closely monitoring the price action in the S&P 500 Index, which has been showing leadership compared to the NASDAQ for several months. As annotated on the daily chart below, the S&P 500 SPDR ($SPY) is nearing a key near-term level of price support. If the lows of the past two days in $SPY are breached, it would be indicative of a failed breakout to new highs. With two or more distribution days, our stock market timing system could soon revert back to a “sell” signal.


As for specific ETFs, we have noticed that money is the rotating out of financials (which was the leading sector on the way up), and rotating into the energy sector. If the stock market remains at least somewhat healthy in the coming weeks, we could see further gains in energy sector (gas/oil stocks and ETFs). That’s why we entered SPDR S&P Oil And Gas ETF ($XOP).

As explained in our March 18 analysis, we also continue to look for a low-risk short selling entry point into SPDR Gold trust ($GLD), which ideally would be a bounce to the $158-$160 area, followed up by a large opening gap down or a big intraday selloff. Everyone’s talking about how the Cyprus news will cause gold to explode higher, but it certainly has not reacted very positively to the news this week. That’s because it’s dead on a technical level, so we don’t care about news. Although it’s not on our “official” watchlist going into today, we are still internally monitoring the price action of this ETF.

Position Detail

We are reducing long exposure in both portfolios by roughly 33%. Below is the exact number of shares we will be selling at market on the open and the remaining share size after the sell (no change to $XME short position):

  • ITB – Selling 75 shares on the open, 150 shares remaining
  • XOP – Selling 25 shares on the open, 50 shares remaining
  • HCA – Selling 30 shares on the open, 70 shares remaining
  • SWFT – Selling 50 shares on the open, 100 shares remaining
  • DHI – Selling 75 shares on the open, 100 shares remaining
  • DK – Selling 50 shares on the open, 75 shares remaining

For those wondering why we put on a few long positions yesterday and are reducing long exposure the next we have a simple answer. We do not operate with a crystal ball. Our job is to note what goes on each and every day and react accordingly. Sometimes we get it wrong, but over the long haul we are right more often than not. Thursday’s selling in the S&P 500 did not produce a distribution day; however, the price action was ugly. Rather than ignore what happened yesterday and stick with our positions (the gambler mentality), we decided to take a proactive approach and cut back our long exposure. By doing so we are not giving up on the market (and can profit from further upside), but we are acknowledging that the odds of the market selling off have increased.

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.

Please leave your comment below!

Your email address will not be published. Required fields are marked *