Commentary:

The Nasdaq Composite posted its fourth straight day of losses yesterday, while the more technology focused Nasdaq 100 Index touched its 50-day moving average for the first time since the current uptrend began in the middle of August. Stocks gapped modestly higher on the open, trended lower throughout the late morning and mid-day, then moved in a choppy, sideways range throughout the remainder of the session. The Nasdaq Composite lost 0.5%, the S&P 500 slid 0.4%, and the Dow Jones Industrial Average closed 0.3% lower. The S&P Midcap 400 declined 0.5%, while the small-cap Russell 2000 gave up 0.3%. Each of the major indices finished above their lows, but in the bottom third of their intraday trading ranges. It was the fourth time in the past five sessions that the broad market settled the day near its intraday low.

Total volume in the NYSE declined by 2%, while the Nasdaq’s volume was on par with the previous day’s level. Despite each of the major indices once again closing in the red, turnover remained subdued. The biggest positive of the past week’s losses has been the lack of heavy institutional selling. In both exchanges, only one of the past four “down” days have been on higher volume. While the bulls may be taking a break for a while, the bears have not yet demonstrated an extreme willingness to sell. Of course, it would not be illogical for one to conclude that institutional traders are absent on both sides of the market due to the holiday season. When volume returns after the new year, we’ll get a clear idea as to which way the mutual funds, hedge funds, pension funds, and other big players want to take the market. Until then, it’s wise to take it easy with no trade entries, especially on the long side.

In the December 13 issue of The Wagner Daily, we explained why we initiated a new short position in the iShares DJ Transportation (IYT) the previous day. Specifically, we liked that it had formed the right shoulder of a bearish “head and shoulders” chart pattern, so we expected further downside. The IYT short trade has followed through nicely since then, so we took profits by covering the position for a 3-point gain yesterday. Although IYT is still slightly above our original downside price target, we made a judgement call to lock in the gain because it failed to bounce at support of its 200-day MA on the way down. This tells us that it could easily snap back up to the 200-MA, or perhaps higher, if the market bounces. An initial bounce and subsequent failure to hold above the 200-day MA a few days later would have increased the odds of further downside in the short-term, but that wasn’t the case. Nevertheless, we netted a solid gain on this setup:

One sector we are stalking for potential short entry is the Retail Index ($RLX), which closed below support of its 50-day moving average for the first time since August 30. More importantly, the break of the 50-day MA followed a failed breakout to a new all-time high last week. Failed breakouts out of a long base of consolidation are often among the most profitable short setups because all the bulls who bought the breakout become trapped. Their selling a few days later attracts the interest of the bears, who spotted the failed breakout. That’s how the $RLX index went from a new record high down to closing below its 50-day MA only four days later:

In the short-term, the $RLX index is a bit oversold and not at an ideal entry point for a short sale. However, a bounce in the next day or two would provide a positive risk/reward ratio for new trade entry on the short side. The Retail HOLDR (RTH) is a very popular ETF for trading the sector, but a list of other Retail ETFs can be found by downloading our free Morpheus ETF Roundup guide.

As for the broad market, it’s probably best to avoid entering new positions today. With an extended holiday weekend coming up, volume is likely to be very light today. When turnover dries up, erratic and whipsaw conditions often occur. So, rather than looking for new trade entries, it’s best to focus on managing existing positions and making a watchlist for potential entries next week.

NOTE: The U.S. stock markets will be closed on Monday, December 25, in observance of Christmas Day. The Wagner Daily will not be published that day, but regular publication will resume on Tuesday. Have a great holiday weekend with your friends and family!

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Today’s Watchlist:

There are no new setups for today, as we don’t expect a lot of follow-through ahead of the holiday weekend.

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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):
QID long (350 shares from Dec. 7 entry) – See important notes below regarding this position
bought 52.83, stop 50.21 (dividend adjusted), target 55.63 (dividend adjusted), unrealized points = + 1.42, unrealized P/L = + $497

GLD long (400 shares from Dec. 19 entry) –
bought 61.25, stop 60.36, target 64.40, unrealized points = + 0.13, unrealized P/L = + $42

MZZ long (250 shares from Dec. 19 entry) – See important notes below regarding this position
bought 63.46, stop 60.14 (dividend adjusted), target 65.51 (dividend adjusted), unrealized points = (0.22), unrealized P/L = ($55)

Closed positions (since last report):

IYT short (400 shares from Dec. 12 entry) –
sold short 84.45, covered 81.39, points = + 3.06, net P/L = + $1,216

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

$58,868

Notes:


Per intraday e-mail alert, we took profits on the IYT short position into yesterday’s close.

Regarding QID and MZZ, both traded “ex-dividend” on December 20. As such, their prices were adjusted lower to account for the dividend payment that will be made to shareholders on December 27. The net result is no change in the overall profit or loss of the position, but stop and target prices had to be adjusted lower by the exact amount of the dividend distributions. For QID, an additional gain of $0.567 per share will be included in the performance reporting after the position is closed, while both the stop and target prices have also been lowered by this amount. For MZZ, the adjustment was $1.14 per share. Note that the “Unrealized points” and “unrealized P/L” figures already account for the dividend distributions that will be made. New guidelines will soon be put into place to simplify future occurrences of dividend and/or capital gain distributions for ETF positions. See the December 21 issue of The Wagner Daily for a thorough discussion of ETF dividend distributions.

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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