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The Wagner Daily


Commentary:

Yesterday was a tale of two markets, as enthusiasm in the tech arena powered the Nasdaq higher, but the S&P and Dow were little changed. Further, an intraday tug-of-war between the bulls and bears made for a whippy and spastic session as well. Stocks gapped sharply higher on the open, drifted slightly lower throughout the morning, then fell apart at mid-day. Then, just as the major indices plunged 1.5% from their intraday highs and began to look pretty ugly, buyers arrived in the final ninety minutes. The late-day reversal shoved the Nasdaq back towards its morning high, while the S&P and Dow settled near the middle of their intraday ranges. The broad market’s divergence left the Nasdaq Composite with a 1.0% gain and the Dow Jones Industrial Average with a 0.1% loss. The S&P 500 advanced just 0.2%. The small-cap Russell 2000 closed 0.2% higher, while the S&P Midcap 400 was unchanged.

Volume picked up across the board, leaving mixed implications of institutional activity. Total volume in the NYSE increased 10%, as volume in the Nasdaq ticked 8% higher. The Nasdaq’s solid gain on higher volume enabled the index to score a bullish “accumulation day,” helping to counteract the four days of higher volume selling (“distribution days”) that have cropped up in recent weeks. Still, it’s not exactly positive that the higher turnover in the NYSE correlated to a loss in the Dow and just a marginal gain in the S&P. At the intraday low of the S&P, volume in the NYSE was on pace to be even higher than it was, but trading activity decreased slightly during the late afternoon rally. This means the S&P was actually on pace for a “distribution day” before the closing reversal. Despite the strength of the final ninety minutes, declining volume in the NYSE still fractionally exceeded advancing volume. The Nasdaq ratio was positive, though only by a margin of about 2 to 1.

When an index gaps open above the previous day’s high, fails to hold the gap, then sells off below the prior day’s low, such bearish price action normally causes the index to close near its intraday low, forming a “bearish engulfing” candlestick in the process. However, yesterday’s action was rather unusual in that the main stock market indexes gapped above their previous day’s highs, plunged below the prior day’s lows, then zoomed higher into the close. This was especially true of the Nasdaq, which closed near its intraday high. Clearly, it was an indecisive session as the buyers and sellers battled it out. On a technical level, one possible explanation for the erratic price action was the testing of the primary uptrend line in the S&P 500. Yesterday’s low in the index correlated to the lower channel support of its uptrend that has been in place since the August 16 low. This uptrending channel is illustrated on the daily chart of the S&P 500 SPDR (SPY):

Unlike the S&P 500, the Nasdaq is still well above the lower channel support of its primary uptrend, as well as its 20-day EMA. The S&P 500, as you can see on the SPY chart above, dipped below its 20-day EMA and closed just above it. Both the S&P Midcap 400 and Russell 2000 (which we remain short) also probed well below their 20-day EMAs, but managed to close just above those short-term support levels. Showing a bit of relative weakness lately, the Dow was the only one of the major indices to close below its 20-day EMA, albeit not convincingly.

Most of the ETFs in the fixed-income (bond) sector broke out yesterday, creating potential short to intermediate-term buying opportunities. One such example is the iShares 20+ year Treasury Bond Fund (TLT), which broke out above its intermediate-term downtrend line. It also popped above convergence of its 20 and 50-day MAs that had been acting as resistance for the past two weeks. Its breakout is shown below:

Along with TLT, many other fixed-income ETFs broke out as well. The iShares Corporate Bond Fund (LQD), which we have been long for more than six weeks, broke out above a major area of consolidation and its 200-day MA:

On the surface, the fixed-income ETFs appear to have a very low volatility. However, it’s important to remember that each of them also pay substantial dividends on a monthly basis. LQD, for instance, has only moved one point higher since our August 31 long entry, but it has also paid two separate dividends since then, totaling 97 cents per share. The profit from the total dividend distributions of September and October have nearly equaled the actual capital gain. With breakouts happening on the daily charts, the capital gains of the fixed-income ETFs should start to increase as well.

On the short side, the S&P Utilities SPDR (XLU) may be in play. Two days ago, XLU broke support of its intermediate-term uptrend line from the August low. Since then, it has been unable to climb back above new resistance of that trendline, and is also in danger of breaking its 20-day EMA. Looking at the daily chart of XLU below, notice how the October peak also fell just shy of horizontal price resistance from the July high:

With the possible reversal pattern setting up in the Utilities sector, we like XLU for a short sale entry on a break below yesterday’s low. Patience to wait for a break of the low will ensure that yesterday’s action was not just a shakeout ahead of a bullish resumption of the uptrend. The Utilities HOLDR (UTH) and the inversely correlated UltraShort Utilities ProShares (SDP) are two alternative plays in the sector.

Given yesterday’s wild broad market activity, caution is required with new trade entries today. If the major indices manage to rally above yesterday’s highs, it could spell the end of the short-term correction that began on October 11. Conversely, a clear break of yesterday’s lows will increase the odds of a deeper, more intermediate-term pullback. If the main stock market indexes only oscillate within yesterday’s respective trading ranges, be prepared for another tug-of-war that could lead to a roller-coaster ride. If yesterday’s action is any predictor of what’s on tap in the coming days, the only thing we can say with any degree of confidence is to expect the unexpected. As always, trade what you see, not what you think!


Today’s Watchlist:


XLU – S&P Utilities SPDR
Short

Shares = 500
Trigger = 40.47 (below yesterday’s low and 20-day EMA)
Stop = 41.39 (above yesterday’s high)
Target = 38.53 (support of the 61.8% Fibonacci retracement)
Dividend Date = December 2007

Notes = See commentary above for 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):

      LQD long (350 shares from August 31 entry) – (see notes below regarding dividend distributions)

      bought 104.99 (avg.), stop 104.88, target 107.48, unrealized points + 2.00, unrealized P/L + $700

      IWM short (350 shares from October 11 entry) – sold short 83.72, stop 85.21, target 80.70, unrealized points + 1.48, unrealized P/L + $518

      UNG long (300 shares total – 250 shares from Oct. 16, added 50 on Oct. 17) –

      bought 41.28 (avg.), stop 38.23, target 46.40, unrealized points + 0.41, unrealized P/L + $123

    Closed positions (since last report):

      (none)

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

      $78,401

    Notes:


      Per intraday e-mail alert, we added to the UNG position when it broke out above the high of its short-term consolidation. New average price reflected above. We have also raised the stop on LQD, now that it has finally broken out above its range.

      On September 4, LQD traded ex-dividend, with a dividend distribution of 49 cents per share. On October 1, LQD traded ex-dividend and paid out 48 cents per shares. Unrealized points and P/L figures include these distributions.

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Edited by Deron Wagner,
MTG Founder and
Head Trader

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