Downward momentum from Monday’s selloff triggered an opening gap lower yesterday morning, but each of the major indices except the Nasdaq reversed to close marginally higher. The S&P 500 recovered from a 0.5% opening loss and finished with a gain of 0.2%. The Dow Jones Industrial Average also advanced 0.2%, but the Nasdaq Composite continued its recent pattern of negative divergence by losing 0.3%. The small-cap Russell 2000 was unchanged and the S&P Midcap 400 managed to close 0.1% higher. The broad market descended from its high in the final thirty minutes of trading, but each of the indices still closed in the upper third of their intraday ranges.
Turnover rose across the board. Total volume in the NYSE was 5% higher than the previous day’s level, while the Nasdaq’s volume increased by 4%. Volume in both exchanges returned to above their 50-day average levels for a change. The Nasdaq’s loss on higher volume was technically a bearish “distribution day,” but the bullish intraday pattern, small percentage loss, and minimal volume increase prevent us from making a definitive declaration of such. Mixed market internals confirmed the tug-of-war in the broad market. In the NYSE, advancing volume exceeded declining volume by nearly 3 to 2. The Nasdaq ratio, however, was negative by the same margin.
As expected, the streetTRACKS Gold Trust (GLD) bounced off the triple convergence of support that we discussed in yesterday’s newsletter, gaining 1.2% in the process. Individual gold mining stocks led the recovery in the spot gold commodity, enabling the CBOE Gold Index ($GOX) to zoom 2.8% higher. We bought GLD when it opened above the previous day’s high and the position is now showing a gain. The Market Vectors Gold Miners (GDX) rallied the same percentage as the $GOX index and, more importantly, closed above resistance of its hourly downtrend line. This increases the odds that it will resume its primary uptrend by moving back to its December 5 high. We liked GDX for potential long entry as well, but bought GLD instead because the triple convergence of support made for a lower risk entry point. We have illustrated the trendline break of resistance on the hourly chart below:
The most notable technical event that occurred yesterday was the Nasdaq’s break of its daily uptrend line that began with the lows of August 2006. Last week, the index tested support of its primary uptrend line on several occasions, but recovered to close at or above it each time. As the daily chart below illustrates, this time was different. Notice how the Nasdaq made a definitive break below trendline support yesterday:
With the Nasdaq below its trendline support, the next obvious downside target would be its 50-day MA at the 2,397 area. We feel odds are pretty good that the index at least touches its 50-day MA in the coming days, though it’s more difficult to predict whether or not it will close below it. Conversely, new overhead resistance should now be found at the prior uptrend line.
Another important occurrence was yesterday’s test of 50-day moving average support for the Russell 2000 Index. Of all the major market indexes we follow, this is the first one that has already fallen to test support of this pivotal level. But even though it touched its 50-MA yesterday morning, it’s positive that the index bounced off support to close firmly above it:
If the Russell 2000 holds above its 50-day MA for the next week, it could begin to form a new base from which to rally, but a firm close below the 50-MA would be an ominous sign for the entire market. Curiously, both the S&P and Dow are continuing to ignore the weakness in the Nasdaq, Russell, and S&P Midcap indices. It seems that indecision is the name of the game right now, which is never fun for trend traders.
As for our open positions, we now have four of them. The short position in the iShares DJ Transportation (IYT) is showing a gain of more than one point and continuing to show relative weakness to the broad market. We also remain long the UltraShort QQQQ ProShares (QID), the ETF that is inversely correlated to the Nasdaq 100 Index. The position is hanging out near our original entry point, but we still like the setup and feel it has good potential to surge higher. A move below yesterday’s low in the Nasdaq would likely trigger a nice surge in the price of QID. Yesterday, we added two new positions. The first was our long entry in GLD and the second was a new long position in the UltraShort Midcap ProShares (MZZ), which is also showing a bearish pattern like the Nasdaq.
There are no new setups for today, as we are now near our maximum buying power based on the $50,000 model account size.
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):
IYT short (400 shares from Dec. 12 entry) –
sold short 84.45, stop 85.92, target 80.95, unrealized points = + 1.23, unrealized P/L = + $492
GLD long (400 shares from Dec. 19 entry) –
bought 61.25, stop 60.36, target 64.40, unrealized points = + 0.55, unrealized P/L = + $220
QID long (350 shares from Dec. 7 entry) –
bought 52.83, stop 50.78, target 56.20, unrealized points = + 0.17, unrealized P/L = + $60
MZZ long (250 shares from Dec. 19 entry) –
bought 63.46, stop 61.28, target 66.65, unrealized points = (0.79), unrealized P/L = ($198)
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
Both GLD and MZZ long triggered yesterday. Per intraday e-mail alert, we lowered the share size in MZZ to reduce risk from buying higher than our intended trigger price.
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Edited by Deron Wagner,
MTG Founder and