Commentary:
Stocks concluded the week with a strong session of gains last Friday, though the intraday price action was a bit indecisive again. The major indices gapped higher on the open, drifted down to the flat line by mid-day, then rallied back to their highs in the afternoon. It was a pattern that repeated itself several times last week. The Nasdaq gained 1.9%, the S&P 500 1.4%, and the Dow Jones Industrial Average 1.0%. The small-cap Russell 2000 and S&P Midcap 400 indices motored higher by 1.9% and 1.2% respectively. All of the main stock market indexes finished at or near their intraday highs, another common occurrence as of late.
Higher turnover that would have confirmed the presence of institutional buying was the main factor missing from last Friday’s rally. Total volume in the NYSE declined 13%, while volume in the Nasdaq was 8% lighter than the previous day’s level. With five “distribution days” on the table over the past month, a bullish “accumulation day” would have helped to counteract the recent days of institutional selling. Nevertheless, last Friday’s trading activity was still substantial. In both the NYSE and Nasdaq, total volume levels exceeded their 50-day averages. Market internals in the NYSE were the most solid we’ve seen in a while. Advancing volume exceeded declining volume by nearly 5 to 1. The Nasdaq ratio was positive by just 2 to 1.
After a steep correction down to its 200-day MA just two months ago, the S&P Metals and Mining SPDR (XME) has roared back to a new high. XME broke out to a new all-time high last Friday, after consolidating near its prior high throughout most of October. XME closed about 1.5 points above its breakout level, but a pullback to about half of last Friday’s range would provide a low-risk buy point. The breakout is illustrated on the daily chart below:
Although other ETFs have also broken out to new highs after correcting below their 200-day MAs in August, one thing we like about XME is the base of consolidation it formed first. Many of the international ETFs, for example, have also surged back to new highs, but in a more parabolic fashion. As such, they are more likely to fall harder in the event of a broad market pullback. ETFs that breakout from a lengthy period of consolidation have a more solid base of support in the event of a pullback.
The PowerShares WilderHill Clean Energy Fund (PBW), which we profited from on last month’s breakout above the 50-day MA and downtrend line, also broke out to a new high last Friday. Consolidating for nearly three weeks, PBW dipped below its 20-day EMA just once, then steadily pushed to a new high a few days later. The pullback to the 20-day EMA also coincided with support of its primary uptrend line off the August low. The gentle correction and subsequent breakout are annotated on the daily chart of PBW below:
Many of the stocks that comprise PBW are related to solar energy, a sector that has absolutely been on fire lately! One look at leading stocks like SunPower (SPWR), First Solar (FSLR), JA Solar Holdings (JASO), and Suntech Power Holdings (STP) confirms that statement is not just a corny pun. With the solar energy sector showing such relative strength, odds are good that PBW makes another leg higher from its current breakout. Unlike XME, PBW closed just a few cents above resistance of its prior high. Therefore, assuming it doesn’t gap much on today’s open, it is not too far extended for an entry near last Friday’s close.
Both the S&P 500 and Dow Jones Industrials moved back above their 20-day EMAs last Friday. Although this is bullish, both indexes still have not fully absorbed the overhead supply from the broad-based October 19 sell-off. The same could be said of the Russell 2000 and S&P Midcap 400 indices. The Nasdaq Composite, however, is looking pretty good now, poised for a nice breakout above its three-week base of consolidation. Be aware that the markets may remain choppy and indecisive until Wednesday afternoon’s announcement on economic policy from this week’s highly anticipated meeting of the Federal Reserve Board.
Today’s Watchlist:
PBW – PowerShares WilderHill Clean Energy Fund
Long
Shares = 500
Trigger = 24.77 (above last Friday’s high)
Stop = 23.74 (below last Friday’s low)
Target = new high (will trail stop)
Dividend Date = n/a
Notes = See commentary above for explanation of the setup. Remember to use the MTG Opening Gap Rules to adjust the trigger price in the event of an opening gap up. Note that our stop is relatively tight, below last Friday’s low, as we want to exit the trade quickly if the breakout fails to hold.
In addition, we are stalking the S&P Metals and Mining SPDR (XME) for a potential long entry. However, we want to assess its intraday price action for a pullback, rather than listing a trigger price in the pre-market. If we buy it, we’ll promptly send an intraday e-mail alert with details.
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:
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Open positions (coming into today):
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UNG long (300 shares from October 24 entry) – bought 38.93, stop 38.65, no target (will trail stop), unrealized points + 1.12, unrealized P/L + $336
DXD long (175 shares from October 26 entry) – bought 47.61, stop 47.08, target 53.20, unrealized points (0.39), unrealized P/L ($68)
TLT long (500 shares from October 24 entry) – bought 90.72, stop 89.42, new high (will trail stop), unrealized points (0.22), unrealized P/L ($110)
TWM long (300 shares from October 24 entry) – bought 65.24, stop 62.20, no target (will trail stop), unrealized points (2.49), unrealized P/L ($747)
Closed positions (since last report):
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(none)
Current equity exposure ($100,000 max. buying power):
- $84,353
Notes:
Per intraday e-mail alert, we already bought half of the DXD setup from last Friday. We adjusted the DXD stop just 11 cents lower, in order to give a bit of “wiggle room” below its closing price. However, because we scaled in with small share size, our stop is limited to less than $100 (basically a scratch) if the trade stops out. The original setup for the remaining half position has been canceled for now.
Edited by Deron Wagner,
MTG Founder and
Head Trader