Commentary:
Yesterday’s session was rather uneventful, as the major indices gapped slightly higher on the open, then traded in a narrow, sideways range throughout the entire day. The Nasdaq Composite gained 0.5% and finished at a six-year closing high. The Dow Jones Industrial Average also advanced 0.5%, the S&P 500 rallied 0.4%, and the S&P Midcap 400 Index edged 0.3% higher. The small-cap Russell 2000 was unchanged. Breaking last week’s pattern of bullish closes, the main stock market indexes settled near the middle of their intraday ranges, but the trading ranges were narrow anyway.
Not surprisingly, lighter volume accompanied yesterday’s gains. Total volume in the NYSE eased 14%, as volume in the Nasdaq came in 22% below the previous day’s level. NYSE trading fell below its 50-day average level and was the lightest in more than two weeks. Both quiet price action and lower turnover was to be expected ahead of Wednesday’s Federal Reserve Board meeting. In both the NYSE and Nasdaq, advancing volume exceeded declining volume by just under 2 to 1.
Since the intermediate-term stock market bottom from mid-August of this year, international ETFs have been one of the strongest groups of exchange traded funds. While many domestic industry sectors remain below their prior highs from the summer, a plethora of international ETFs have rocketed to new historical highs. It probably won’t shock you to learn that the iShares Xinhua China 25 (FXI) has been the top gainer of the group, realizing massive gains practically every week. However, the Barclay India Total Return Index (INP) has stealthily been catching up, and has suddenly begun to show relative strength to FXI as well. To illustrate this, take a look below at the “percentage change” chart that compares the gains of FXI and INP since their August 16 lows:
In the chart above, one can see that FXI has zoomed a whopping 79% in just over two months. Not far behind is INP, which has still logged a massive 57% gain. More importantly, but less apparent, is that INP may be setting up to outperform future gains in FXI. Relative strength in INP came onto our radar screen at the beginning of last week, when INP recovered from its pullback much faster than FXI. At the vertical line labeled “A,” the closing prices of October 23, notice that INP had already rallied back to its prior high from earlier in the month, but FXI only retraced about 50% of the correction. On October 26, INP moved to a new all-time high (annotation “B”), then surged an impressive 8% yesterday. Meanwhile, FXI has yet to move back above its prior high from mid-October. The newfound relative strength in INP may be more clear when comparing the individual daily price charts of both INP and FXI below:
Certainly, we cannot declare the momentum in FXI is dead. However, it is fair to say that the relative strength in INP may provide investors and traders with both greater profit potential and lower risk in the at least the short to intermediate-term. To ensure that the Indian market is maintaining its relative strength to China, we suggest comparing the price gains of FXI and INP on a daily basis. This can be done through either individual charts or a single “percentage change” chart like the one shown above. To confirm the ongoing presence of relative strength, INP should pull back less than FXI on the “down” days, while rallying more than FXI on most of the “up” days. As long as that trend persists, it’s a good play to buy INP on pullbacks.
Often, there are counter-trend moves in the broad market that precede key meetings such as Wednesday’s FOMC decision on interest rates. When they occur, advanced traders can often find profitable short-term momentum trade opportunities. When the market began to show a bit of weakness yesterday afternoon, we considered a quick, two-day short sale that we would have covered before Wednesday’s Fed announcement. However, the trade failed to trigger for entry because the major indices held above their intraday lows. We also scratched our long entry in the PowerShares Clean Energy (PBW) because its opening gap up negatively skewed the risk/reward ratio. We’re still stalking it for a potential buy entry on a pullback, as well as XME, but will be avoiding new entries in the broad-market ETFs, and probably most others, until after tomorrow’s Fed announcement.
Today’s Watchlist:
With tomorrow’s Fed announcement on tap, there are no new setups in the pre-market today. However, we continue to stalk both PBW and XME for potential long entries on a pullback.
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 40.17, no target (will trail stop), unrealized points + 2.07, unrealized P/L + $614
TLT long (500 shares from October 24 entry) – bought 90.72, stop 89.42, new high (will trail stop), unrealized points + 0.13, unrealized P/L + $65
TWM long (300 shares from October 24 entry) – bought 65.24, stop 61.99, no target (will trail stop), unrealized points (2.59), unrealized P/L ($777)
Closed positions (since last report):
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PBW long (500 shares from October 29 entry) – bought 25.33, sold 25.34, points + 0.01, net P/L ($5)
DXD long (175 shares from October 26 entry) – bought 47.61, sold 46.77, points (0.84), net P/L ($151)
Current equity exposure ($100,000 max. buying power):
- $76,520
Notes:
Per intraday e-mail alert, we scratched PBW after it triggered. DXD stopped out after falling below its opening 20-minute low, but TWM reversed higher after marking its 20-minute low. The new stop in TWM remains 10 cents below yesterday’s 20-minute low. Note that we have also trailed the stop higher in UNG, to just below the hourly uptrend line.
Edited by Deron Wagner,
MTG Founder and
Head Trader