Commentary:

Stocks followed up the previous day’s rally with another session of gains, but an afternoon sell-off minimized the market’s advance. The S&P 500 gained 0.2%, as did both the small-cap Russell 2000 and S&P Midcap 400 indices. The Nasdaq Composite and Dow Jones Industrial Average each closed 0.4% higher. The Nasdaq was showing a 1.1% gain at its late morning peak, but the bears took control in the afternoon and eroded a majority of those gains. With both the S&P and Nasdaq finishing in the bottom half of their intraday ranges, it sets a negative tone going into today’s session.

Total volume in the NYSE increased by 5%, while volume in the Nasdaq was 9% higher than the previous day’s level. Since the major indices all finished in positive territory, the gains on higher volume enabled both the S&P and Nasdaq to register a bullish “accumulation day.” In the NYSE, volume also popped back above its 50-day average level. When comparing the turnover of the morning rally with that of the afternoon selloff, it was positive that volume declined slightly as stocks were selling off. At mid-day, before the retracement off the highs began, volume in the NYSE was on pace to finish 9% above the previous day’s level. Market internals showed more strength in the Nasdaq, where advancing volume exceeded declining volume by a ratio of 2.2 to 1. But in the NYSE, advancing volume only fractionally beat declining volume.

One sector that has begun rolling over and is showing a lot of relative weakness is Real Estate (REITs). There are several indexes that track the sector, but the most popular is the DJ Equity REIT Index ($DJR). Take a look at its daily chart:

Until the end of last month, the index was consolidating nicely at its all-time high, but it ran out of gas and failed its minor breakout attempt on October 31. From November 1 – 3, the $DJR index reversed sharply and lost a total of 3.9%. Comparatively, the S&P 500 fell only 0.9% during that same period. The index dropped to support of its 50-day moving average on November 3, which led to the usual reaction of a bounce the following day. If the sector’s correction was going to be short-lived, we would have expected the $DJR index to hold above the low of November 6, but yesterday’s action was ugly. After bouncing off its 50-day MA for only one day, the index immediately sold off and closed yesterday below its November 6 low. As you can see, the $DJR finished yesterday right at its 50-day MA. We feel the Real Estate sector could fall rapidly over the next week if the index fails to get back above yesterday’s high within the next one to two days.

We sent an intraday e-mail alert to subscribers yesterday, informing them we were selling short the iShares Cohen & Steers REIT (ICF), but there are several other ETF options as well. They are: iShares DJ Real Estate Index (IYR), Vanguard REIT (VNQ), and StreetTRACKS Wilshire REIT Index (RWR). All of them have a very similar chart pattern to the $DJR index, so take your pick. Note that if you attempt to sell short any of these ETFs, they 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 phoning your broker to specifically ask them to do a “locate” for shares of the ETF you are attempting to sell short. With a little push, your firm should easily be able to call around and get shares for you within a matter of minutes. Just a little advice for those of you who run into this issue.

Yesterday, both the Nasdaq Composite and Nasdaq 100 traded at new multi-year highs on an intraday basis, but the afternoon selloff caused them both to close back within the range. If yesterday’s lows are violated, this could lead to a rapid selloff that often accompanies failed breakouts at pivotal highs. A break below yesterday’s low in today’s session should at least send the Nasdaq brothers down to test support of their November 3 lows. Beyond that, the 50-day moving average would be the next major area of support. The failed breakout to the new high is circled on the daily chart of the Nasdaq Composite below:

The S&P 500 and Dow Jones Industrial Average, both of which bounced off support of their multi-month uptrend lines yesterday, are poised to reverse back down to test the lower channel support of their trendlines.

We expect a re-test of the November 3 low in the coming days. If that doesn’t hold, be prepared for a move down to the 50-day moving averages in those indices as well.

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Today’s Watchlist:

USO – U.S. Oil Fund
Long

Trigger = above 53.58 (above downtrend line and 200-MA/60 min.)
Target = 57.85 (just below resistance of Sept. 28 high)
Stop = 52.07 (below the Nov. 6 low)
Shares = 400

Notes = This trade did not trigger yesterday, but remains on our watchlist today. Note the updated trigger price and share size. As per the commentary in the November 7 issue of The Wagner Daily, we are looking to play a short-term technical bounce in USO if it breaks out above its 7-week downtrend line. Again, we must reiterate that this is a short-term, momentum-based setup and we are not trying to pick a bottom. If you are a new trader, you may consider passing on this trade because, depending on how much follow-through we get, it may require a rapid entry and exit, perhaps even buying and selling on the same day. Upon entering, we want to be “right or right out,” meaning we want to see immediate price confirmation after the trigger. As always, assume we are using the trigger, stop, and target price listed above unless we send an intraday e-mail alert informing you otherwise.

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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 (200 shares remaining from Oct. 25 & 30 entries – sold 200 shares on Nov. 3) –
bought 59.20 (avg.), stop 60.05, target 64.45, unrealized points = + 2.84, unrealized P/L = + $568

OIH long (100 shares remaining from November 2 re-entry – sold 100 shares on Nov. 7) –
bought 132.01, stop 134.29, target 142.10, unrealized points = + 4.97, unrealized P/L = + $497

DBC long (700 shares from November 6 entry) –
bought 24.87 (avg.), stop 23.87, target 26.59, unrealized points = + 0.12, unrealized P/L = + $84

ICF short (250 shares from November 7 entry) –
sold short 94.23, stop 96.78, target 89.45, unrealized points = + 0.14, unrealized P/L = + $35

Closed positions (since last report):

OIH long (100 shares (half position) from November 2 re-entry) –
bought 132.01, sold 136.68, points = + 4.67, net P/L = + $465

SMH short (500 shares from October 27 entry) –
sold short 33.91, covered 34.39, points = (0.48), net P/L = ($240)

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

$67,121

Notes:


Per intraday e-mail alert, we made a judgment call to sell half of the OIH position to lock in gains yesterday and also tightened the stop on the remaining shares. Unfortunately, SMH hit our trailing stop by only 3 cents before rolling over in the afternoon, but it’s just as well because that sector has been indecisive and choppy over the past several weeks. Shortly after covering SMH, we sent an e-mail alert that we were selling short a new position of ICF, which has a better chart pattern and is showing more relative weakness than SMH anyway. USO did not trigger yet, but remains on our watchlist with an adjusted trigger price above yesterday’s high. We also increased the share size to 400.

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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