Commentary:
After a positive start to yesterday’s session, the broad market dropped into negative territory at mid-day, but stocks recovered during the final hour and posted mild gains across the board. The Nasdaq Composite, which gained 0.3%, put in its third consecutive day of gains, but the index closed right at resistance of its 200-day moving average. The S&P 500 also closed 0.3% higher, while the Dow Jones Industrials gained 0.6%. The midcap S&P 400 Index bounced 0.5%, but the smallcap Russell 2000 Index showed relative weakness and was unchanged. Like the Nasdaq, the Russell also closed right below its 200-day MA. Each of the major indices closed near their best levels of the session, but just below their morning highs.
Considering the market’s weakness throughout the first half of the month, it was positive to see the major indices register another day of gains, but declining volume once again failed to confirm the bounce. Total volume in the NYSE declined by 8% yesterday, while volume in the Nasdaq was 16% lighter than the previous day’s level. Although the Nasdaq has closed higher for the past three days, it is important to note that volume has declined on each of those days as well. This tells us that institutions have not yet shown any signs of returning to the market. As such, one would be correct in viewing the recent bounce as a mere technical correction as opposed to the start of renewed buying interest. A majority of this month’s down days have occurred on higher volume, but each of the up days have occurred on declining volume. Until this trend changes, it is wise to be net positioned on the short side of the broad market (or in cash if you don’t have a margin account).
In the October 14 issue of The Wagner Daily, we reported that we had taken profits on the last of our short positions and had moved to cash in anticipation of a correction to the market’s weakness. Specifically, we mentioned that we would like to see the S&P 500 rally up to the 1,195 to 1,200 level in order to provide us with low-risk entry points to short the broad-based ETFs such as SPY. Yesterday’s second day of gains put the S&P at the 1,190 level and within striking distance of that major area of resistance just below 1,200. Odds are good the S&P will now test that area of resistance within the next few days. As such, regular subscribers will see we are now stalking two different ETFs for new short entries if they fail at key resistance levels in the coming days. The entire broad market bounce has lacked conviction, which gives us the confidence to sell short into the current bounce.
As mentioned earlier, both the Nasdaq Composite and the Russell 2000 Index closed just below resistance of their 200-day moving averages yesterday. Most likely, we will see both indices have trouble recovering back above their 200-day MAs, which will act further as a weight on the S&P. IWM (iShares Russell 2000 Index) is now providing us with a short entry point that provides a good risk-reward ratio. If you short in this vicinity and the IWM rips back above its 200-day MA, you can get out with a small loss. But if the 200-day MA enables its primary downtrend to resume from here, the profit potential on the short side is much greater than the risk because there is only minimal price support below. Remember that support of the weekly uptrend line on IWM was broken last week as well, which further adds to the resistance. The daily chart below illustrates the bounce into both the 200 and 10-day moving averages:
Similarly, the daily chart of the Nasdaq Composite shows that the Naz will require strong buying interest to overcome the overhead supply and technical resistance of both its 200 and 10-day moving averages as well:
Perhaps the biggest factor that can impact the broad market’s direction in the short-term is the plethora of quarterly corporate earnings reports on deck this week. Big players scheduled to report in the pre-market today are: Johnson and Johnson, 3M Company, and Merrill Lynch. After the close, all eyes will be on both Intel and Motorola earnings reports. Yahoo!, Ebay, and Google, three of the biggest Internet players, are scheduled to report earnings today, tomorrow, and Thursday respectively. Obviously, any one of these companies has the power to move not only their industry sectors, but the entire broad market if the surprise is great enough. Caution is therefore warranted with all new positions this week, although the charts clearly continue to favor the short side over the long. Those of you who trade individual stocks and sector ETFs should be aware of earnings dates of any key stocks, which you can easily do by referencing the freeYahoo! Finance earnings calendar.
Today’s Watchlist:
DIA – DIAMONDS (Dow Jones Indu. Avg.)
Short
Trigger = below 102.90 (below yesterday’s low and hourly uptrend line)
Target = 99.60 (just below support of April low)
Stop = 104.55 (above the 50% Fibo retracement from Sept. high to Oct. low)
Shares = 300
Notes = Notice how DIA has rallied into overhead resistance of its prior lows from August and September, which we feel provides a low-risk short entry point here. Remember that prior support becomes the new resistance after the support is broken.
IWM – iShares Russell 2000 Smallcap Index
Short
Trigger = 15 cents below today’s opening 20-minute low ONLY (see notes below)
Target = 59.70 (below support of May 9 high)
Stop = 64.55 (above the 20-day MA)
Shares = 400
Notes = Per the commentary above, we are looking to short IWM due to its relative weakness and rally into the 200 and 10-day moving averages. Note, however, that we will only short IWM today if it trades more than 15 cents below its low of the first 20-minutes. If it never violates its 20-minute opening low today, we will not short it yet. A break of the 20-minute low will likely set a negative tone for the remainder of the day, but it’s not negative if it holds above its 20-minute low. If you have difficulty locating shares of IWM to short, you may wish to call your broker and ask them to locate shares for you (or change to a broker with a wider selection of ETFs for shorting).
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):
-
(none)
Closed positions (since last report):
-
(none)
Current equity exposure ($100,000 max. buying power):
- $0
Notes:
We remain flat.
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Edited by Deron Wagner,
MTG Founder and
Head Trader