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The Wagner Daily


Commentary:

The broad market followed through on Monday’s gains yesterday, causing the major indices to test key resistance of their 20-day moving averages. After opening flat, stocks trended higher throughout the morning, pulled back slightly in the afternoon, then crawled back towards their highs in the final hour. Both the S&P 500 and Nasdaq Composite gained 0.6%, while the Dow Jones Industrial Average rallied 0.5%. The small-cap Russell 2000 and S&P Midcap 400 indices were each higher by 0.8%.

Can you guess what was once again missing from yesterday’s rally? Disappointing turnover once again failed to confirm the gains. Total volume in the NYSE only declined by 1%, but remember that the previous day’s level was already the second lightest day of the year. Volume in the Nasdaq increased 3% over the previous day’s level, though it was still well below average. Most likely, we will begin to see the return of institutional trading activity after this afternoon’s Fed announcement on interest rates. However, the big question is whether they will join the party and run stocks higher or sell into the strength of the short-term bounce. Market internals were solid yesterday, as advancing volume exceeded declining volume by a ratio of approximately 2.7 to 1 in both exchanges.

Yesterday, we discussed the likelihood of the major indices testing pivotal resistance of both their 20-day moving averages and their “swing highs” from earlier this month. We didn’t need to wait too long, as the test came yesterday. The Nasdaq Composite probed 2 points above its 20-day MA on an intraday basis, but closed 2 points below it. The index also closed just above intraday resistance of its March high:

Similar to the Nasdaq, the Dow Jones Industrials traded 3 points above its 20-day MA yesterday, but finished 3 points below it. The Dow also has more overhead supply to contend with because it is still 60 points below its prior high from March 12:

Of the “big three” major indices, the S&P 500 was the only one that finished above its 20-day MA, albeit by only 3 points. The index also closed right at its prior high from March 9:

It’s common for stocks and indices to close above their 20 or 50-day moving averages (in a downtrend) or below them (in an uptrend) for one or two days before reversing. Often, the resumption of the primary trend (down in this case) comes only after many investors are fooled into believing a trend reversal has occurred. Causing enough buying pressure for an index like the S&P to close above its 20-day MA for a day or two usually does the trick. As you might recall, this is what occurred during the broad market’s last substantial correction from May – July of 2006. Take a look:

As you can see, the S&P 500 closed above its 20-day MA for exactly one day (June 2) before swiftly reversing and subsequently taking out its prior low. Obviously, it’s impossible to know if this same scenario will occur again. However, the continuation of bearish price to volume patterns have increased the likelihood of another move lower before going much higher. Today should be very interesting because the major indices have run into their 20-day moving averages at the same time the Federal Reserve Board will be releasing their highly anticipated update on economic policy. We expect a strong and immediate reaction either way, as current levels are just too pivotal for there not to be.


Today’s Watchlist:

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


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):

      TWM long (125 shares from March 20 re-entry – SEE NOTES BELOW) –

      bought 69.28, stop – SEE NOTES BELOW, target 77.85, unrealized points = (0.49), unrealized P/L = ($61)

      IYR short (275 shares from March 13 entry) – sold short 85.75, stop 88.69, target 78.30, unrealized points = (0.85), unrealized P/L = ($234)

      RTH short (300 shares from March 19 entry) –
      sold short 100.61, stop 102.98, target 96.70, unrealized points = (1.07), unrealized P/L = ($321)

      SDS long (400 shares – 300 from March 1 entry , 100 added on March 7) –
      bought 60.51 (avg.), stop – SEE NOTES BELOW, target 64.18, unrealized points = (1.08), unrealized P/L = ($432)

    Closed positions (since last report):

      TWM long (250 shares from March 7 entry) – bought 71.94, sold 68.88, points = (3.06), net P/L = ($770)

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

      $86,689

    Notes:


      Despite all of our recent trade setups looking good at the time of entry, the last few days have indeed been challenging! Being on the short side of the market at the right time can be highly profitable, as proven by the gain of more than $3,000 that The Wagner Daily netted in just FXI short and DXD long at the end of February. The flip side, however, is that upside corrections in downtrending markets are often vicious, more so than pullbacks from the highs in uptrending markets. Until the major indices at least move back above their 50-day moving averages, we remain in an intermediate-term downtrend, but that doesn’t mean it’s easy to stay with short positions in the near-term.

      Quite frankly, staying with our short positions in the S&P 500 (SDS long) and the Russell 2000 (TWM long) right now is a bit tricky. The S&P 500 is toying with pivotal resistance levels, as explained above. As such, we obviously don’t want to close the SDS position with the S&P sitting right at resistance of its prior high. On the other hand, we can not and will not take larger than usual risk on these trades. So, the only solution is to close the positions if they stop out, but remain prepared to immediately re-enter if they reverse and confirm our original thinking. Even then, we can scale in with partial share size in order to minimize our risk. This is what we did with the TWM re-entry yesterday.

      TWM hit our adjusted stop, but we re-entered with only a half position so far. Per yesterday’s e-mail alert, we will still be adding another 125 shares of TWM if it trades above 69.78.

      As for updated stops on SDS and TWM . . .In the event of a sharp pre-opening gap in the S&P or Nasdaq, in either direction, we will send updated stops on SDS and TWM before the market opens. Otherwise, we will send an intraday e-mail alert with new stop prices 30 minutes after the market opening, as we want to mark the opening highs and use those levels. Ideally, our positions will just trade in a sideways range before this afternoon’s Fed announcement. Due primarily to technical resistance, we believe the FOMC comments may provide an impetus for a negative market reaction regardless of what is actually announced.

      Our stop placement and trade management of the past few days has definitely been more active than usual, but trading is never as “black and white” as we theoretically think it should be. Professional traders maintain discipline at all times, but also realize that flexibility is sometimes required for the “grey areas.” Please feel free to e-mail us if you require any clarification on open positions at any time.

    Please check out the Wagner Daily Subscriber Guide to learn how to get the most from your subscription.

    Edited by Deron Wagner,
    MTG Founder and
    Head Trader

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