Commentary:
The major averages came up for air yesterday, breaking a three day losing streak and all closing higher than Wednesday’s close. The Dow gained by .42%, closing at 10422.05, the S&P added .37%, closing at 1214.62, and the Nasdaq Composite ticked higher by .20%, posting 2110.78 as its closing value at 4pm yesterday. For the first time in four days market breadth as measured by advancing volume minus declining volume closed positively. Overall volume, while respectably high, did not however come in higher than the day before, and therefore the market did not log an accumulation day yesterday.
If there was any way to characterize yesterday’s trade, it would have to be of the classic “reversal day” variety. As we know, markets very rarely make what is known as a “V-shaped” reversal after protracted selling. Usually between a change in trend is the reversal day which is defined by a small body candle (sometimes doji) on the dailies and a mix of strong and weak sectors fighting it out as the market finds its legs and decides if this is indeed “the bottom” at least for the time being. That was exactly the type of market we had yesterday, as the S&P closed relatively close to its open and sector action was mixed with a number of sectors notching gains on the day and seemingly as many turning in further losses. The daily chart below of the S&P shows the small body daily bar that comprised yesterday’s action.
One of the stronger groups on the day was the homebuilders sector ($DJUSHB). Although the group was relatively strong yesterday on the heels of better than expected earnings from KBH, the volume patterns in the stocks clearly show just how weak the sector is and just how important it is to pay attention to volume as well as price when making investment decisions. Note the difference in volume on Toll Brothers (TOL) in the chart below over the last four days. Its a clear indication that sellers are in control here as these stocks move lower. Most homebuilders charts are starting to exhibit this same volume pattern which would confirm the recent change in trend in this popular sector. This is the classic setup that you want to see whenever shorting a stock or sector. Quite simply, more volume on the down days, and less on the up days. This confirms that you have an imbalance of sellers to buyers which will always lead to lower prices down the line.
Obviously the question on everyone’s mind after a selloff is quite simply, “when do we go up again?” and “how far?”. As professional traders who simply place bets on events that have the greater odds (but not certainty) of happening, we cannot really know for sure. One of the tools that we know works historically is Fibonacci retracement. A detailed explanation of Fibonacci retracements can be found here. Keeping in mind the general rule of thumb that if a retracement of a move is 38.2% or less (the first Fibonacci level), the recent trend is still intact, take a look at the hourly SPY chart below to give yourself an idea of where the S&P needs to bounce to if it is to invalidate the recent bear move. As you can see below, yesterday’s reversal day did not even get up to the first Fibonacci retracement from the weakness that started on September 9th. Fibonacci levels are often an excellent gauge to deter!
mine the difference between technical bounces and outright changes in trend.
Today’s Watchlist:
FXI – Xinhua China 25 Index Fund
Long
Trigger = above 63.20 (above September 20 high)
Target = 68.00 (to set new 52 week highs over the prior pivot of 65.90)
Stop = 61.57 (below yesterday’s low)
Notes =
Since its inception in mid October of 2004, the Xinhua China 25 Index Fund (FXI) has performed rather well. This emerging market ETF is currently consolidating nicely after a strong move higher since June of this year. FXI has now found support at its 50ma daily (red line) and has broken the downtrend of the pullback move. A break at the trigger price should be the catalyst for the next move upwards. The position size will be 300 shares if it triggers.
Daily Reality Report:
Below is an overview of all open positions, as well as a performance report on all positions that were closed only since the previous day’s newsletter. Net P/L figures are based on the $50,000 Wagner Daily model account size. Changes to open positions since the previous report are listed in red text below:
Open positions (coming into today):
-
GLD long (600 shares remaining, sold 200 on Sept. 22) –
bought 44.59 (avg.), stop 45.00, target new high (will trail stop), unrealized points = + 1.77, unrealized P/L = + $1,062
IYR short (200 shares remaining, covered 200 on Sept. 22) –
shorted 65.77, stop 64.60, target 61.10, unrealized points = + 2.30, unrealized P/L = + $460
Closed positions (since last report):
-
Covered half (200 shares) of IYR into weakness at 62.54.
Sold quarter (200 shares) of GLD at the open at 46.80
Current equity exposure ($100,000 max. buying power):
- $39,908
Notes:
GLD did not gap up and we took a quarter of the position off into strength here very close to yesterday’s open as Gold has had a monstrous advance as of late is is due for a pullback. Our target for another exit will be in the $50 area. We covered half of the IYR into weakness as it is approaching its target.
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Edited by Deron Wagner,
MTG Founder and
Head Trader