Commentary:

The broad market trended lower throughout the first half of yesterday’s session, but the broad market indices recouped their losses after testing support of their respective lows of the prior day. Selling pressure during the final thirty minutes caused the indices to close mixed and near unchanged levels. The S&P 500 was unchanged for the second consecutive day and the Dow Jones Industrials gained 0.1%, but the Nasdaq Composite lost 0.2%. The S&P 400 Midcap and Russell 2000 Smallcap indices both closed 0.1% lower. Each of the major indices finished near the middle of their intraday ranges, indicating indecision throughout yesterday’s session.

Total volume in the NYSE declined by 1% yesterday, but turnover in the Nasdaq was 5% higher than the previous day’s level. The losses on higher volume caused the Nasdaq to register another “distribution day,” its third within the past two weeks. Declining volume marginally exceeded advancing volume in both exchanges, but most market internals were not very negative overall.

Since the week began, the S&P 500 has been showing a great amount of indecision and has only traded in a choppy, sideways range. Looking at the daily chart, you will notice the index has formed “doji star” candlestick patterns in each of the past three days. The “doji star” forms when an index or stock closes at or near its opening price, but swings widely on both sides of unchanged on an intraday basis. Such price action usually tells us that the bulls and bears are playing tug-of-war throughout the session, but neither party wins by the end of the day. When a “doji star” forms after a trend has been in effect for a long period of time, it often precedes a trend reversal. However, it can also indicate indecision that occurs when supply and demand are roughly in equilibrium. Such has been the case for the past three days. We have circled the “doji stars” on the daily candlestick chart of the S&P below:

Obviously, it is not a good idea to be aggressive on either side of the market when major indices such as the S&P are chopping around in a sideways range. Overtrading or trying to anticipate the market’s next direction during such conditions results only in churning your account and making your broker rich. Therefore, we recommend caution on both sides of the market right now. If not already positioned mostly in cash, you can reduce your risk by simultaneously being long the sectors with relative strength and short those with relative weakness. When the market eventually determines its next direction, you can quickly close your position on the opposite side of the market if it loses its relative strength or weakness.

So which sectors and ETFs are showing the most relative strength or weakness to the broad market right now? Gold (GLD), which we remain long with a nice profit, is consolidating near its all-time high and is among the strongest industry sectors right now. Even better is that its direction has not been closely correlated to the direction of the broad market indices. GLD probed below support of its daily uptrend line during a stop hunt yesterday, but it closed the day back above support of its primary uptrend line. An intraday probe below a key support level often precedes a rally to new highs, which we expect within the next several days. The chart of GLD below illustrates support of its daily uptrend line (regular subscribers should note that we have also raised our stop on GLD as per the position summary below):

Another sector that remains strong is Oil Service (OIH), which is also holding near its all-time high. The chart of OIH is indeed bullish, but we recommend caution because it has become rather extended since its strong uptrend began in the beginning of 2004. It is presently on its third stage breakout after gaining 128% since the start of 2004, so it could easily correct at any time. Be prepared to quickly close your position if you buy OIH and it begins to correct. The same could be said of Utilities (UTH or XLU), which has a similar chart pattern.

As for relative weakness, we still like and remain short IYR, which is one of the two main ETFs that tracks REITs (Real Estate Index Trusts). The Home Construction Index ($DJUSHB) is breaking down on its weekly chart and REITs are now falling along with it. BBH (Biotech HOLDR), which we discussed yesterday, has also broken horizontal price support and is now breaking down:

BBH has fallen considerably during the past five sessions and could easily bounce from here, but we would view any retracement as a low-risk opportunity to initiate a new short position if it bounces into resistance. As for the broad-based indices such as SPY, DIA, or QQQQ, you may want to wait on the sidelines to see what happens next. It’s always more profitable and less risky to simply follow the trend rather than anticipate the direction of a new one. Remember to trade what you see, not what you think!

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Today’s Watchlist:

There are no new trade setups for today, as we are near our maximum buying power based on the $50,000 model account size.

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Daily Performance 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 from Sept. 7 and 9 entries; sold 200 on Sept. 22) –
bought 44.59 (avg.), stop 45.35, target new high (trailing a stop), unrealized points = + 1.66, unrealized P/L = + $996

IYR short (200 shares remaining from Sept. 13 entry; covered 200 on Sept. 22) –
shorted 65.77, stop 64.60, target 59.60, unrealized points = + 2.97, unrealized P/L = + $594

MDY short (300 shares from Sept. 27 entry) –
shorted 128.09, stop 130.75, target 123.20, unrealized points = (0.35), unrealized P/L = ($105)

Closed positions (since last report):

(none)

Current equity exposure ($100,000 max. buying power):

$78,842

Notes:


Note the new stop on GLD and new target on IYR. MDY short also triggered yesterday.

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here for glossary and explanation of terms used in The Wagner Daily

Click here to view MTG’s past performance results (updated monthly).

Edited by Deron Wagner,
MTG Founder and
Head Trader