Commentary:
Stocks gapped open higher last Friday morning, but the bears quickly took control, causing the major indices to fall to their previous day’s lows. A small bounce in the afternoon lifted equities off their lows, but most of the market still closed in negative territory. The S&P 500 lost 0.2% and the Nasdaq Composite finished 0.1% lower. A sixth straight day of losses in the Dow Jones Industrial Average caused the index to close back below the 12,000 level that was heavily hyped by the financial media last month. Small and mid-cap stocks posted gains, but they also fell more than the other indices in recent days. The Russell 2000 bounced 0.4% and the S&P Midcap 400 edged 0.2% higher. For the week, the S&P 500 and Dow Jones Industrials both declined 0.9%, while the Nasdaq Composite lost 0.8%.
The positive of Friday’s session is that turnover declined across the board, indicating an absence of heavy selling by institutional traders. In the NYSE, total volume declined by 9%. Overall volume in the Nasdaq was 6% lighter than the previous day’s level. In both exchanges, volume dipped below the 50-day average levels for the first time in four sessions. Market internals were only marginally negative. Declining volume in the NYSE exceeded advancing volume by a margin of 1.3 to 1. The Nasdaq ratio was negative by only 1.2 to 1.
The spot gold commodity continued its recent charge, rallying more than $4 per ounce to close the regular session just below $630. Our long position in the StreetTRACKS Gold Trust (GLD) has been enjoying the ride and is now showing a marked-to-market gain of more than 8% since our initial entry on October 25. Although it has not yet hit our initial price target, we made a judgment call to lock in profits on half the position in Friday’s session. We expect GLD to continue higher, but is due for a normal pullback. Rather than holding the entire position through the pullback, we sold half of our shares into strength for a gain of $3 per share. We have also raised the stop above breakeven on the remaining shares, thereby removing all risk from the trade.
The Oil Service HOLDR (OIH) has been tricky lately, but we’re glad we stayed with it. After bouncing off support of its 50-day MA on November 2, OIH surged 3.3% last Friday. Oil and Gold were the top-performing sectors that day. Within the next several days, it should test resistance of its prior high from October 26. A breakout above that level would represent follow-through of what has now become a bullish “cup and handle” pattern. The Amex Natural Gas Index ($XNG) is sporting a similar pattern, but looks even better because it is closer to its 52-week high. The index is also poised to break out above the range of consolidation that has been in place for more than a year. If that occurs, such a breakout would surely lead to substantial upward momentum. Below is a weekly chart of the $XNG index:
Although there are numerous energy ETFs, there presently is not one that specifically tracks the natural gas stocks. But when interested in a sector that doesn’t have a corresponding ETF, you can created your own “synthetic ETF” by simultaneously trading a small basket of leading stocks in the sector. For the $XNG index, some ticker symbols to consider are: DVN, XTO, APC, APA, EOG, and SWN.
As the equities market has begun correcting, we have simultaneously been seeing sector rotation into the commodities and associated stocks. Gold and Energy are clearly the leading sectors in the short-term, and their leadership is likely to continue longer, especially if the broad market correction continues. With the sudden leadership in commodities, one ETF we are targeting for long entry is the DB Commodity Index Trust (DBC), which closed Friday right at a pivotal resistance level. Take a look:
With DBC, 24.75 is the resistance level which stopped several rally attempts last month. If it pops over that level, we plan to buy the breakout. Regular subscribers should note our detailed trigger, stop, and target prices below.
In the November 3 issue of The Wagner Daily, we suggested the likelihood of a rally attempt in the S&P 500 due to the close at its primary uptrend line. On Friday, the index attempted to rally right out of the starting gate, but promptly reversed lower. Still, the minimal loss in the S&P leaves it only a hair below its uptrend line. It’s rather common for an index to close one day below a primary support level, then rip back above it the following day. However, the overall performance in leading stocks was rather dismal last week, especially the number of breakouts that failed. Without strong leadership by top growth stocks, bounces in the stock market are typically short-lived. Therefore, until the market shows its hand by confirming the direction of its next move, we are maintaining a neutral to slightly bearish short-term bias. Focusing on buying the industry sectors with the most relative strength and shorting those with relative weakness is a good way to sidestep indecision in the broad market.
Today’s Watchlist:
DBC – DB Commodity Index Trust
Long
Trigger = above 24.82 (over the high of the range)
Target = 26.59 (probe above resistance of the Aug. 7 high)
Stop = 23.87 (below Oct. 31 low)
Shares = 700
Notes = See commentary above for detailed explanation of the setup.
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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OIH long (200 shares from November 2 re-entry) –
bought 132.01, stop 131.56, target 142.10, unrealized points = + 3.84, unrealized P/L = + $768
GLD long (200 shares (half position remaining) from Oct. 25 & 30 entries) –
bought 59.20 (avg.), stop 59.73, target 64.45, unrealized points = + 3.10, unrealized P/L = + $620
SMH short (500 shares from October 27 entry) –
sold short 33.91, stop 34.39, target 30.60, unrealized points = + 0.95, unrealized P/L = + $475
Closed positions (since last report):
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GLD long (200 shares from Oct. 25 & 30 entries) –
bought 59.20 (avg.), sold 62.36, points = + 3.16, net P/L = + $628
Current equity exposure ($100,000 max. buying power):
- $56,110
Notes:
Per intraday e-mail alert, we sold half of GLD into strength last Friday. We also raised the stops on the remaining shares, as well both the OIH and SMH positions.
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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