The major indices managed their third straight day of gains yesterday, as the Dow Jones closed at a fresh four and half year high. The Nasdaq Composite again showed indecision, retracing back to the flat line at one point, but the index finished the day 0.8% higher. Both the small-cap Russell 2000 and mid-cap S&P 400 similarly gained 0.9%. The Dow Jones Industrial Average kept pace with a 0.6% gain, while the S&P 500 advanced 0.7%. Each of the major indices finished at their intraday highs, hinting at institutional support into the close.
Total volume in the Nasdaq increased by 9% yesterday, enabling the index to register a bullish “accumulation day” because it closed higher and on higher volume. However, total volume in the NYSE was 6% lighter than the previous day. Of the past three “up” days, the NYSE has only had one “accumulation day.” This tells us that the bears may have been kept at bay over the past several days, but institutions have not been overly anxious to gobble up shares on the long side. Nevertheless, market internals were quite strong yesterday. Advancing volume exceeded declining volume by an impressive ratio of 4 to 1 in the NYSE, but the ratio was positive by only 2 to 1 in the Nasdaq. Generally speaking, any adv/dec volume ratio higher than 2 to 1 is considered firmly bullish.
Yesterday’s gains in the S&P 500 finally pushed the index above its downtrend line that we have discussed over the past several days. It also closed just over its prior high from January 30. If it holds the breakout, it will only take a rally of five more points to push the S&P to a new multi-year high:
Being that the S&P closed above its prior high of the former downtrend, but just below its 52-week high, trading could become a bit erratic and choppy over the next week. This is further compounded by the fact that the Nasdaq Composite is still below its daily downtrend line.
What we find interesting about this market is that there appears to be a “changing of the guards” taking place. The Dow Jones, for years a laggard that many people stopped paying attention to, has suddenly been showing relative strength and leading the broad market higher. Conversely, the Nasdaq has been drifting along with little enthusiasm. Below are daily charts of the Dow Jones and Nasdaq Composite that illustrate this divergence:
Most likely, the Dow is seeing strength simply due to normal institutional sector rotation, but the reason is irrelevant. What is relevant is knowing which of the broad-based ETFs offer the best odds of profitability both on the long and short side of the markets. On the long side, DIA and SPY obviously have the least amount of overhead resistance. QQQQ and MDY have the most resistance. In fact, MDY appears to be completing the right shoulder of a bearish “head and shoulders” pattern, just as OIH did before it dropped more than 10% in just one week. Needless to say, we typically have a high degree of success with shorting clearly defined head and shoulders chart patterns, but the divergence between the major indices may cause MDY to become whippy. Therefore, while we still may short MDY if it begins to roll over, reduced share size and close adherence to our stops is key. If the S&P holds above its prior high through today, we’ll begin to look at new long setups in strong sectors next week. GLD (Gold Trust) is one such ETF that may provide us with a nice entry off support of its 50-day moving average.
NOTE: The U.S. stock markets will be closed on Monday, February 20 in honor of Washington’s Birthday holiday. As such, The Wagner Daily will not be published that day. Regular publication will resume on Tuesday, February 21. Enjoy the day off!
MDY – S&P 400 Mid-Cap Index
Trigger = below 140.44 (below yesterday’s low and 20-MA)
Target = 133.70 (just above support of Jan. 3 low)
Stop = 142.70 (above yesterday’s high)
Shares = 300
Notes = This setup did not trigger yesterday, but we are stalking it for possible entry today. Note the new trigger and stop prices above. See commentary above for complete explanation of the setup.
Also, be aware that MDY may be on your broker’s “hard to borrow” list. This means your brokerage firm’s web site may initially tell you that shares are not available for shorting. But if this occurs, we recommend you phone your broker and specifically ask them to locate shares of MDY to borrow for short selling. With a little push, your firm should easily be able to call around and get shares for you within a matter of minutes. If not, consider switching to a different firm who offers a wider selection of stocks and ETFs for shorting. Just a little advice for those of you run into this issue.
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):
XLU short (700 shares from Feb. 2 entry) –
shorted 32.03, stop 32.14, target 30.15, unrealized points = + 0.02, unrealized P/L = + $14
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
No changes to report.
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