Commentary:
Stocks got off to a strong start yesterday morning, but an afternoon selloff diminished the gains. It was the opposite of the previous day’s action in which the market fell in the morning, then reversed in the afternoon. A positive reaction to an earnings report from Cisco Systems helped the Nasdaq Composite to show relative strength for a change, finishing 0.8% higher. The S&P 500 was 0.4% higher at its morning high, dipped to a 0.2% intraday loss in the afternoon, then bounced off its low in the final hour to close with a 0.1% gain. The Dow Jones Industrial Average was unchanged for the second consecutive day, but small cap stocks kept pace with the Nasdaq. The Russell 2000 Index advanced 0.7%, while the S&P Midcap 400 rallied 0.4%. The S&P 500 closed in the middle of its intraday range, pointing to continued indecision amongst traders and investors.
Turnover in the NYSE was on par with the previous day’s level, but total volume in the Nasdaq ticked 2% higher. In the NYSE, it was the fourth straight day of lighter than average volume. Markets often become choppy when volume dries up, so it’s not surprising to see the recent indecision in the S&P and Dow. Advancing volume in the Nasdaq exceeded declining volume by a healthy margin of nearly 3 to 1, but the NYSE ratio was only flat. The price divergence in the major indices yesterday coincided with the divergent market internals.
The Nasdaq Composite finally popped above resistance of the 2,470 level yesterday, and is now approaching the test of its multi-year high just over the 2,500 level. As illustrated by the horizontal line on the daily chart below, the 2,470 level should now act as support on any weakness in the Nasdaq. If, however, the Nasdaq fails to hold above it, the index may begin to follow through on the symmetrical head and shoulders pattern it has formed:
Curiously, the Dow Jones Industrial Average has closed within 0.1% of unchanged for four consecutive days:
Such a tight range in the Dow is highly unusual, so be prepared for a fast and furious resolution. The longer an index consolidates, the more momentum behind the eventual move out the range. Given that the Dow is trading at its all-time high, the consolidation is bullish and should resolve itself to the upside. The S&P 500 is consolidating at its high in a very tight range as well. However, as we have recently mentioned, we’re dealing with a tired market that is highly extended on the monthly charts. Therefore, proceed with caution if buying any breakouts right now.
The erratic intraday trends of the past two days indicates a tug-of-war is taking place between the bulls and bears. Rather than placing bets on which side will win, we plan to remain on the sidelines and wait until the trends become more clear. In our hedge fund, we are curently positioned largely in cash, as well as a few stocks and ETFs, both long and short, that are not directly correlated to the direction of the broad market. The StreetTRACKS Gold Trust (GLD) and the CurrencyShares Euro Trust (FXE) are two such examples of ETFs that bear very little correlation to whether the major indices rally or correct lower.
Today’s Watchlist:
FXE – CurrencyShares Euro Trust
Long
Shares = 400
Trigger = above 130.62 (above resistance of 2-month downtrend line. . .seen more clearly on a daily chart)
Stop = 129.04 (below the 20-day MA)
Target = 133.70 (resistance of Dec. 8 high)
Dividend Date = n/a
Notes = This setup from yesterday did not yet trigger, but remains on our watchlist for today. See commentary in the February 7 issue of The Wagner Daily for an 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:
-
Open positions (coming into today):
-
GLD long (300 shares from Jan. 23 entry) –
bought 63.90, stop 62.31, target 69.30, unrealized points = + 0.73, unrealized P/L = + $219
QID long (400 shares total – 300 shares from Jan. 22 entry, 100 shares from Jan. 31 add) –
bought 53.23 (avg.), stop 51.10, target 58.35, unrealized points = (1.63), unrealized P/L = ($652)
Closed positions (since last report):
-
(none)
Current equity exposure ($100,000 max. buying power):
- $40,029
Notes:
No changes to the open positions.
Edited by Deron Wagner,
MTG Founder and
Head Trader