Commentary:
A weak close on Wednesday led to an opening gap down yesterday morning, but stocks filled the gap in the first two hours of trading. The major indices then traded in a tight, sideways range before finishing the session flat overall. The S&P 500 and Nasdaq Composite both were unchanged, as the Dow Jones Industrial Average edged 0.1% lower. It was the Dow’s fifth consecutive session of losses, though the index has fallen only 1.2% off its high. Small-cap stocks, which usually produce more extreme moves than the S&P and Nasdaq in both directions, showed relative weakness. The Russell 2000 Index lost 0.3%, while the S&P Midcap 400 declined 0.1%.
Turnover tapered off slightly yesterday, as total volume in the NYSE came in 7% lighter than the previous day’s level. Volume in the Nasdaq similarly declined by 4%. Since the major indices were flat, not much can be inferred by the lighter volume. A look beneath the surface shows that market internals were only marginally negative yesterday as well. In the NYSE, declining volume exceeded advancing volume by only 1.2 to 1. The Nasdaq ratio was negative by just under 3 to 2.
One sector that has begun showing relative strength and positive money flow is the Internet Index ($GIN). Throughout most of October, the $GIN consolidated in a narrow range, just below resistance of its 200-day moving average. On October 24, the index broke out above its 200-day MA and the high of its range, then trended higher over the next several days. Since the broad market has been in correction mode since the October 27 selloff, spotting relative strength within the sectors is relatively simple. We merely look for those sectors which either have dropped a lesser percentage than the S&P and Nasdaq. Even better are sectors that advanced while the major indices declined. The $GIN Index is one such sector:
Since its October 26 peak, the Nasdaq Composite has fallen 1.9% and the S&P 500 has lost 1.6%. The $GIN Index, however, has gained 0.8% during the same period. When a sector does not fall when the broad market does, it is usually the first to surge higher when the overall market reverses back up. Further, sectors with relative strength are the last to fall if downward pressure on the broad market continues. These are the two basic premises for trading sectors with relative strength or weakness to the major indices. When the stock market finishes its correction and attempts to rally, we expect the Internet stocks to be among the top gainers, but make sure you are buy the ETF with the most relative strength to the sector index itself. Although it is the most well-known of the Internet ETFs, the Internet HOLDR (HHH) has been showing relative weakness to the $GIN. The simple reason is that sector leader Google (GOOG) is not represented within HHH. As with all the HOLDRS, the underlying components have not changed since their inception years ago (other than through acquisitions). Notice how HHH is still trading below its prior high from July, but the $GIN Index is above its corresponding high. HHH is also below its 200-day MA, whereas the $GIN broke out above its a few weeks ago:
Unfortunately, there are not a lot of alternative ETFs that are directly correlated to the Internet sector. If looking for one, your best bet may be the First Trust DJ Internet (FDN), a little known Internet ETF that does have representation by Google.
After moving down to support of its 20-day moving average on Wednesday, the S&P 500 closed yesterday right on support of the lower channel of its primary uptrend:
Since the current uptrend began, the vicinity of the 20-day moving average has acted as support that has enabled every correction in the S&P to reverse back to new highs. Obviously, we don’t know if that will happen again, but we should at least see a rally attempt in the S&P today. The breadth and volume behind such a rally attempt will give us clues as to whether the index has enough juice left to set new highs, or whether the bounce is something we should be selling into. Because of the poor performance of leading stocks that we discussed yesterday, we think the latter may be the case, but we’ll have more confirmation after we see how the S&P acts here at trendline support.
Today’s Watchlist:
There are no new setups in the pre-market today, although we are stalking the EuroCurrency Shares (FXE) for a potential long entry. After assessing its price action today, we will send an intraday e-mail alert if/when we enter it, or any other new positions.
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:
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Open positions (coming into today):
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GLD long (400 shares total — 200 from Oct. 25 entry, 200 from Oct. 30 entry) –
bought 59.20 (avg.), stop 59.10, target 64.45, unrealized points = + 2.73, unrealized P/L = + $1,092
SMH short (500 shares from October 27 entry) –
sold short 33.91, stop 35.06, target 30.60, unrealized points = + 0.86, unrealized P/L = + $430
OIH long (200 shares from November 2 re-entry) –
bought 132.01, stop 129.71, target 142.10, unrealized points = (0.48), unrealized P/L = ($96)
Closed positions (since last report):
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OIH long (150 shares from October 19 entry) –
bought 131.65, sold 130.28, points = (1.37), net P/L = ($209)
Current equity exposure ($100,000 max. buying power):
- $67,603
Notes:
OIH hit our adjusted stop yesterday, stopping us out for a small loss. However, per intraday e-mail alert, we re-entered the position with 200 shares later in the session. OIH has indeed been tricky and a bit frustrating because it retraced more than anticipated, but it is holding right at support of both its prior downtrend line and 50-day MA. Therefore, the setup is still valid and worthy of re-entry, even at a slightly higher price than where we stopped out. Often, our most profitable trades result from re-entries because our timing was slightly off on the initial entry. If we stop out again, we’ll leave it alone, but we still believe the sector is poised for a move back to its recent highs and perhaps more. Also, note the tighter stop on GLD, which we will trail even higher after it forms a “swing low.”
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Edited by Deron Wagner,
MTG Founder and
Head Trader