Although choppy and indecisive during the first half of the day, the major indices sold off in the early afternoon and closed last Friday below the previous day’s lows and near their lows of the week. The S&P 500 Index and Dow Jones Industrial Average both lost approximately 0.7%, but the Nasdaq Composite once again showed relative weakness and closed 1.6% lower. The selling was broad-based across the S&P 500, Dow Jones, and the Nasdaq as declining volume outpaced advancing volume by a margin of 2.2 to 1 in the NYSE and 1.3 to 1 in the Nasdaq. Volume, however, was approximately 20% lower than the previous day and was the lightest since the holiday-shortened session of November 28. This light volume tells us that the major indices closed lower on Friday due primarily to a lack of buyers as opposed to mass institutional selling. Most likely, this could partially be attributed to the snow storm that began to hit NYC on Friday afternoon.
It is important to note that Friday’s losses caused the Nasdaq Composite to close below its 20-day moving average after only trading above it for 7 days! This is the shortest length of time the index has spent above its 20-day MA, without crossing back down below it, since the primary uptrend began early in the year. This indicates a resumption of the pattern in which the Nasdaq has been subsequently spending less and less time above its 20-day moving average on each subsequent bounce off the 50-day moving average from below. In fact, the 50-day moving average has now risen so closely to the 20-day MA that the Nasdaq Composite is only 18 points away from breaking below its 50-day MA once again. Conversely, both the S&P 500 Index and the Dow Jones Indu. Avg. continue to show relative strength and are both well above their 20-day MAs (for now). The daily chart of the Nasdaq Composite below illustrates double top in the Nasdaq, as well as the close below its 20-day MA and the proximity of the 50-day MA just below:
Fortunately, two of the weakest sectors on Friday were Retail ($RLX.X) and Internets ($GIN.X), which respectively closed 1.02% and 1.49% lower. This worked out well for us because those were the two sectors that we have been swinging with our short positions in RTH and HHH. In the Daily Reality Report below, notice we have tightened the stops to lock in more gains in both of these positions. The Semiconductor Index ($SOX.X) was also quite weak on Friday and closed with a 3.2% loss. The leading sector was the Oil Service Index ($OSX.X), which we predicted on Friday morning due to the previous day’s technical break above its primary downtrend that had been in place for six months. Due to Friday’s follow-through in the index, we bought OIH at $58.05 (per last Friday’s Wagner Daily) when it rallied above its 200-day moving average. The sector showed great relative strength throughout the entire day and actually set a new intraday high as the S&P futures set a new low. As such, we took OIH long over the weekend in anticipation of further upside in the coming week. The chart below illustrates last Friday’s divergence between OIH (Oil Service HOLDR) and SPY (S&P 500 Index):
As the chart above confirms, looking for sectors that are showing relative strength or weakness to the broad market increases your potential profits, but also decreases your risk because the sector will often ignore reversals in the broad market, as OIH did above.
The short-term technical picture for the broad market continues to show us mixed signals. Over the past week, prices have drifted lower after the Nasdaq failed to breakout to a new high at the 2000 level. However, with the exception of one clear “distribution day” last week, the market has been drifting lower on decreased volume. On an intraday basis, the price action of both the S&P and Nasdaq futures remains as indecisive and erratic as we have seen in a long time. Therefore, rather than “rolling the dice,” we will continue to avoid trading the broad-based ETFs such as SPY, DIA, and QQQ until the major indices begin showing signs of trending more steadily (either up or down). Lately, the broad market has largely been ignoring moving averages and other technical indicators on an intraday basis. Rather than attempting to trade ETFs such as SPY or QQQ, we have been finding much more profitability by seeking out individual sector ETFs that are showing relative strength or weakness to the broad market. This has resulted in multi-point gains in RTH (Retail), HHH (Internets), BBH (Biotech), and OIH (Oil Service) over the past week.
On a separate note, the U.S. Dollar is trading at fresh multi-year lows against both the Euro and the Yen in the pre-market today. In the big picture, this is very bad news for the U.S. economy and could solely become the biggest reason for any further weakness in the market this week. As the dollar grows weaker, more and more foreign investors are forced to pull their assets from the U.S. due to the losses they are sustaining from currency devaluation. This has also been attributing to the extremely bullish action in both the price of Gold futures and individual gold stocks. I personally bought a significant amount of gold (and silver) coins over the weekend due to gold’s first weekly closing price over $400 per ounce in over 7 years. In the next Wagner Weekly newsletter, we will look at a 30-year monthly chart of the price of gold and you will clearly see that a big technical breakout and bull market in gold is under way. If anyone else is interested in buying gold itself instead of gold stocks, consider checking out Kitco. MTG has no affiliation with Kitco, but I personally feel they are one of the most reputable gold dealers in the world and they also have a very informative web site on all things related to gold. As always, due your own due diligence. Don’t forget about the gold mining stocks either (NEM, ABX, GFI, PDG, AU, GG, etc.). Finally, remember there is an FOMC meeting tomorrow, so the market is likely to be quiet today until the Feds speak.
Today’s watch list:
(Since we already have three simultaneous open positions, there are no new plays for today. However, we will send an e-mail alert if we spot any solid trade setups for entry today.)
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.
RTH short (1/4 position size, from Dec. 1) –
shorted 92.72, new stop 90.60, target 85.50, unrealized points = + 3.34, unrealized P/L = + $83
HHH short (1/2 position size, from Dec. 3) –
shorted 47.03, new stop at 46.70, target 44.95, unrealized points = + 0.75, unrealized P/L = + $75
OIH long (full position, from Dec. 5) –
bought 58.05, stop 56.80, target 60.40, unrealized points = + 0.68, unrealized P/L = + $68
We let the profits ride on our open positions Friday, but lowered the stops as per above. No changes to the OIH stop yet.
Edited by Deron Wagner,
MTG Founder and President