Commentary:

The S&P 500 built on the gains from the previous day’s breakout, but selling pressure late in the afternoon wiped out a majority of its intraday gain. As of 2:15 pm EST, the S&P 500 was trading 0.8% higher, but a negative reaction to the subsequent Fed Minutes triggered weakness that reduced its closing gain to only 0.2%. Both the Dow Jones Industrial Average and Nasdaq Composite followed similar intraday patterns before finishing higher by 0.3% and 0.5% respectively. Small-cap stocks continued to outperform, as the Russell 2000 Index cruised 0.9% higher. The S&P Midcap 400 advanced 0.6%. Each of the major indices closed near the middle of their intraday ranges.

Turnover in the Nasdaq was 6% higher than the previous day, enabling the index to register its third straight day of accumulation. Total volume in the NYSE, however, declined by less than 1%. Still, volume levels were healthy overall and firmly above their 50-day averages. Market internals were solid. In both exchanges, advancing volume exceeded declining volume by a ratio of approximately 2 to 1.

Yesterday, we entered a new long position in the PowerShares WilderHill Clean Energy (PBW). This ETF, which began showing strength when the Democratic party won control of the U.S. House of Representatives and Senate last week, is unique because it is comprised of a plethora of companies related to the development and production of alternative energy sources. The first thing that caught our attention was that PBW had just broken out above resistance of a six-month downtrend line. Even better, however, was that the breakout coincided with the formation of the right shoulder of a chart pattern known as an “inverse head and shoulders.” As you may recall, this chart pattern was the original reason we began buying the StreetTRACKS Gold Trust (GLD) in late October, which we remain long with a substantial profit. We have illustrated the “inverse head and shoulders” pattern on the daily chart of PBW below. The blue descending line marks the prior downtrend, which should now act as the new support level. Also notice the volume increase over the past two weeks, which shows signs of institutional buying interest.

As for the details, we listed a predetermined trigger price for entry above 18.16. We arrived at this price because we wanted confirmation for PBW to first rally above resistance of its October 26 high of 18.09. PBW triggered on the open, then trended steadily higher throughout the day. If PBW clears its October 16 high of 18.43, three cents above yesterday’s close, it should really begin to take off because that would represent a breakout above the “neckline” of the “inverse head and shoulders” pattern. GLD, for example, rallied four days in a row after breaking out above its “neckline” at the end of last month. To guard against a failed breakout, we have a protective stop on PBW just below the 50-day moving average, which is presently at 17.42. On the upside, it will initially run into significant resistance of its 200-day moving average around 19.13, but we have an ultimate target of 20.15. This target represents a 50% Fibonacci retracement of the entire downward move from the May high down to the September low.

In addition to PBW and GLD, we remain positioned long in the DB Commodity Index Trust (DBC) and short the iShares Cohen and Steers Realty Majors (ICF). DBC is basically unchanged from our original entry point, but we are noticing positive money flow and sector rotation back into commodities. We originally sold short ICF because the Real Estate Index ($DJR) appeared to be rolling over, but strength in the broad market is helping the sector to recover. ICF is near our stop just above yesterday’s high, but we remain short for now. Finally, we re-entered the U.S. Oil Fund (USO) yesterday, when it rallied back above its three-day high and 20-day MA. Oil is sometimes an erratic and choppy sector to trade, but we still love the risk/reward of this setup. With this trade, our profit target (58.85) is nearly five times the amount of our risk (stop at 51.83). With the newfound strength in commodities, USO should easily be able to hold above its prior downtrend line.

Although the broad market locked in another session of gains yesterday, momentum from the weakness into the close may carry into today’s session. But with the Nasdaq closing higher in seven of the past eight sessions, a modest price correction in that index would be neither surprising nor unwelcome. Conversely, the S&P 500 is less extended than the Nasdaq and much closer to lower channel support of its primary uptrend line. As such, new positions in the S&P and Dow-related sectors may provide you with a better risk/reward ratio than trying to buy the Nasdaq at current levels. Obviously, all bets are off with new long entries if either the S&P or Dow were to break support of their primary uptrend lines.

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Today’s Watchlist:

There are no new trade setups for today, as we are near the maximum buying power of our $50,000 model account. Instead, we will focus on managing our existing open positions for maximum profitability.

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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 (300 shares total – 200 from Oct. 25 & 30 entries, 100 added on Nov. 8) –
bought 59.84 (avg.), stop 60.65, target 64.45, unrealized points = + 2.00, unrealized P/L = + $600

PBW long (700 shares from Nov. 15 entry) –
bought 18.11, stop 17.14, target 20.15, unrealized points = + 0.29, unrealized P/L = + $203

DBC long (700 shares from November 6 entry) –
bought 24.87 (avg.), stop 24.35, target 26.59, unrealized points = (0.03), unrealized P/L = ($21)

USO long (400 shares from November 15 re-entry) –
bought 53.04, stop 51.83, target 58.85, unrealized points = (0.54), unrealized P/L = ($216)

ICF short (250 shares from November 7 entry) –
sold short 94.23, stop 97.11, target 89.45, unrealized points = (2.33), unrealized P/L = ($583)

Closed positions (since last report):

(none)

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

$93,960

Notes:

Per intraday e-mail alert, we re-entered the USO position when it rallied to a new three-day high. We still like the setup’s very high risk/reward ratio if it follows-through this time. Our long position in PBW also triggered on the open. The adjusted stop on ICF remains the same for now.

Click here to view MTG’s past performance results (updated monthly).

Edited by Deron Wagner,
MTG Founder and
Head Trader