The broad market began the holiday-shortened week in a festive mood yesterday as each of the major indices rallied sharply off of last week’s consolidation at the 50-day moving averages. After the major indices began yesterday with an opening gap above the previous day’s highs, they each trended smoothly higher throughout the first hour of trading before entering into a sideways consolidation during the late morning that lasted through the early afternoon. After correcting by time, buyers once again stepped in during the final 90 minutes of trading and pushed the major indices to new intraday highs, which is where they closed the day. Most importantly, volume in the Nasdaq increased by 10.5% yesterday, although it only increased by 3.5% in the NYSE. Since the major indices increased AND on higher volume, yesterday was technically known as an “accumululation day,” which is the opposite of a bearish “distribution day.” The Nasdaq Composite led the broad market yesterday with its highest percentage gain (2.8%) in four months. The S&P 500 Index and Dow Jones Industrials rallied 1.6% and 1.2% respectively.
Yesterday’s rally pushed most of the indices back above resistance of their 20-day moving averages and last week’s highs that we discussed in yesterday’s newsletter. On an intraday basis, the steady uptrend provided numerous trading opportunities, but there were not any clear trade setups in the broad market for swing traders because the major indices were trapped between support and resistance going into yesterday morning. Unfortunately, the picture is even trickier going into today because the broad market closed right in the middle of the “chop” from the first three weeks of November. The daily chart of the Nasdaq Composite below illustrates this horizontal range of “chop”:
As you can see from the price band above, which also looks the same for the S&P and Dow, it’s anybody’s guess what the market does today because this is the same price zone that caused a lot of resistance just a few weeks ago. If the indices break out above this range, they will be at new 52-week highs and represent clear sailing. But it’s more likely that the broad market chops around in this range for the rest of the week, especially due to the shortened week and lack of institutional participation around the holiday. Therefore, you will probably find better odds of success with trading individual sector ETFs that are showing relative strength or weakness, rather than trading the broad-based ETFs such as SPY, QQQ, or DIA.
One of the ETFs that caught our attention yesterday was EWJ (Japan Fund), which Morpheus Trading Group bought when it pulled back to support at the 8.60 area last week. Unlike a vast majority of our trades that are based purely on technical analysis, we bought a “long-term” position in EWJ based largely on fundamental analysis because we are bullish on Japan and other Asian countries over the next several years. However, through the use of technical analysis, we were able to pinpoint a low-risk entry point to buy EWJ, even though the trade is based largely on fundamentals. By combining fundamental and technical analysis, we are able to benefit from the “best of both worlds,” although the most important factor is the technical analysis because it enables us to enter the trade with a good risk/reward ratio.
In addition to Fibonacci, the primary technical analysis tool we used to determine last week’s long entry in EWJ was the 20-week simple moving average. Notice that we used the 20-WEEK moving average as opposed to the 20-DAY moving average. The difference, of course, is that the 20-week moving average calculates the average price of the past 20 weeks instead of the past 20 days. While most traders use moving averages on daily charts, few traders we have met understand the importance of weekly charts. Because the time frame of a weekly chart is so long, you really cannot base short-term trade decisions purely on weekly charts, but the weekly charts are of key importance in showing you the “big picture” of major trends in an index or stock. EWJ is a good example of this.
When we bought EWJ after last week’s price correction, the daily chart did not look very bullish because EWJ had broken below both its 20 and 50-day moving averages. The daily chart below illustrates this:
Although EWJ was below its primary moving averages on the daily chart, we focused more of our attention on the longer-term weekly chart simply because we entered the trade with the intention of holding it for several months or more. Therefore, a longer-term time horizon for the trade required a longer-term technical analysis. When we analyzed the weekly chart of EWJ, it showed a much different picture than the daily chart. Primarily, the weekly chart showed that EWJ had perfectly retraced down to support of both its 20-week moving average AND its primary uptrend line from the low of May. Take a look at this convergence of support:
Yesterday’s 2% rally in EWJ immediately put our long position “in the money” by the same percentage because we bought at the bottom of last week’s correction. If we were only looking at daily charts, we would never have been able to predict such a precise and low-risk entry point. However, by expanding our time frame to weekly charts, the picture became very clear that we had convergence of a 20-week moving average and primary uptrend line from the low of May. This convergence provided us with a good risk-reward for buying EWJ. If you want to play it really conservatively, you can place your initial stop just below last week’s low of 8.55, which would represent a break of both the primary uptrend line and the 20-week moving average. However, because of our long time horizon, we are giving this trade a little more wiggle room and using the 50% Fibonacci retracement of the entire move as our stop, right around 7.90. As always, we will trail stops higher as the trade becomes more “in the money.” If you like the EWJ trade idea, you may also wish to check out EWH (Hong Kong Fund) because it too is nearing primary support.
As you are probably aware, note that the U.S. equities markets will be closed on Thursday, November 27, in honor of Thanksgiving Day. The markets will also close early at 1:00 pm EST on Friday, November 28. Due to the holiday, The Wagner Daily will not be published on Thursday, but regular publication will resume on Friday, November 28.
Today’s watch list:
OIH – Oil Service HOLDR
Trigger = above 54.50 (above yesterday’s high and hourly downtrend line)
Target = 55.50 (resistance of the 20-day MA)
Stop = 54.05 (below yesterday’s close)
Notes = OIH has sold off down to its primary weekly support again and put in a reversal attempt yesterday. Confirmation of the reversal would occur on a break of yesterday’s high, which is where we are looking to buy if that occurs. Remember you can watch $OXH.X to track the price of OIH because it more accurately shows you the fair value without the wide spread.
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.
- EWJ long (1/2 position, averaged from Nov. 17 and 19) –
bought 8.66 (avg.), stop at 7.90, unrealized points = + 0.21, unrealized
P/L = + $84
There were no new positions yesterday, but we remain long EWJ.
MTG Founder and President