Commentary:

After
beginning the day with a small opening gap down, the major indices traded in a
tight and narrow consolidation pattern that lasted throughout the entire day.
Some modest buying pressure pushed the broad market slightly higher into the
final hour of trading, but the major indices found resistance near their
respective highs of the previous day and pulled back into the range. The end
result was that SPY (S&P 500 Index) closed flat, while DIA (Dow Jones Indu.
Avg.) and ONEQ (Nasdaq Composite Index) both closed only pennies lower. Total
market volume was nearly the same as the previous day and breadth was nearly
flat as well. Since the previous day was a trending one, it was normal to see
the type of sideways consolidation that occurred yesterday. The broad market’s
ability to hold on to the previous day’s gains was bullish, but resistance of
the prior 52-week highs, which were set on November 7, still looms overhead.

Yesterday’s broad-market performance was mixed, but a few sectors stood
out from the rest. On the downside, the Retail Index ($RLX.X) turned in a 1.3%
loss for the day due largely to weakness in WMT, which missed their quarterly
earnings consensus. The index has been showing relative strength to the broad
market for the past several months, but yesterday’s Wal-Mart news is likely to
be the impetus that spurs a correction in the Retail Index. As such, we
initiated a swing short position in RTH (Retail HOLDR) yesterday, which closed
below support of its 20-day moving average for the first time since September
30. The daily chart of RTH below illustrates the break of support:

The 20-day moving average for RTH, which was formerly support, should
now act as overhead resistance at the 92.80 area. Our price target for the short
position is the 50-day moving average, which is currently at 90.42. Also note
that RTH traded 250% of its average daily volume yesterday, as indicated by the
volume spike. Because all ETFs are synthetic, remember that the bid/ask price of
an ETF will automatically move in direct correlation to the prices of the
underlying stocks that comprise the ETF. Therefore, volume does not matter as
much with an ETF as it would with an individual stock. Nevertheless, yesterday’s
high volume tells us there was probably institutional selling in RTH.

Two of the leading sectors yesterday were Oil Service ($OSX.X) and
Pharmaceuticals ($DRG.X). Despite a flat performance by the S&P 500, the Oil
Service Index gained 2.6%, while the Pharmaceutical Index closed 2.8% higher. We
bought PPH (Pharmaceutical HOLDR) yesterday, with the intention of it being a
multi-day swing trade. However, it hit our profit target the same day we
entered, so we sold PPH for a 1.5 point intraday gain. As you may recall, the
reason we liked PPH going into yesterday morning was because it closed above
resistance of its primary downtrend line, after forming a double bottom on the
daily chart. On the chart below, you will see how well PPH followed through to
the upside:

Just like with RTH, notice the huge volume spike in PPH yesterday.
Institutional money was all over PPH, as indicated by the fact that it traded
more than 600% of its average daily volume!

Interestingly, Oil Service
and Pharmaceuticals are the two sectors that have been LAGGING the broad market
the most during the past several months. This tells us that we are beginning to
see some sector rotation out of the “overbought” sectors (such as Retail) and
into the sectors that have been beaten down. Realize that institutional money is
always at work because very few funds allows a high concentration of cash in
their portfolios. Therefore, when an institution moves money out of a particular
sector, it needs to flow somewhere else; hence the term “sector rotation.” Your
job as a short-term trader is simply to identify where that institutional money
is flowing. Doing so enables you to trade in the sectors that have institutional
support, which always increases your odds of a profitable trade. This is because
approximately 75% of the market’s daily volume is from institutional trading.
This is why we simultaneously shorted Retail (RTH) yesterday, but bought
Pharmaceuticals (PPH).

As for the broad market indices such as the
S&P 500 and the Nasdaq, there is not much to say other than continue to
watch for a breakout of the November 7 highs. The 20-day moving averages on the
major indices continue to rise higher, which is causing a tightening of the
trading range. Therefore, we expect a big move to soon occur. Either the broad
market breaks out to new 52-week highs or it corrects sharply by dropping below
its 20-day moving averages. The market is giving us too many mixed signals to
accurately predict which of those two scenarios will occur, so we recommend you
continue to take it easy both with your share size and quantity of trades. The
best professional traders I know are actually OUT of the market more than they
are in the market. Patience pays big dividends to traders who are willing to
wait for the market to show them clear buy or sell signals, neither of which we
have at this point. Keep tight stops on any open positions you have and remain
nimble and prepared to change your market bias at the blink of an eye.

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Today’s watch list:

QQQ – Nasdaq 100 Index Tracking Stock
Short

Trigger =
below 35.50 (below yesterday’s low)
Target = 34.55 (support of the 50-day MA)

Stop = 35.85 (above yesterday’s close)

Notes = While we are not
confident the market goes lower today, we like QQQ short if it does. We will
only look to short QQQ once it breaks below yesterday’s low, which would
probably lead to a retest of this week’s low.

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Daily Reality Report:

Below is Morpheus Trading Group’s daily
performance report of closed trades and an update on all open positions from The
Wagner Daily (Intraday Real-Time Room trades are reported separately in The
Wagner Weekly). Net P/L figures are based on the quantity of shares represented
in the MTG
Position Sizing Model.

Closed Positions:

PPH long (from Nov. 13) –
bought 74.20, sold 75.76 (avg.), points = +
1.56, net P/L = + $153

Open Positions:

RTH short (from Nov. 13) –
shorted 92.27 (avg.), new stop 93.15, target
90.50, unrealized points = (0.23), unrealized P/L = ($23)

Notes:

Per yesterday’s newsletter, we bought PPH and
shorted RTH. We later sold PPH because it hit our profit target the same day we
entered it, but we remain short RTH for swing. New stop is posted above.

Edited by Deron Wagner,
MTG Founder and President