Commentary:
After a relatively flat open, the major indices grinded their way into slightly positive territory late in the morning, but the bears once again took control in the afternoon. Sellers stepped in during the final hour of trading, sending stocks to new intraday lows. Opposite of how bullish markets often start the day weak, but finish strong, bearish markets frequently surrender morning gains by the closing bell. Tech stocks continued to get pummeled yesterday, causing the Nasdaq Composite to fall 1.7% and realize its fourth consecutive day of substantial losses. In just the past four sessions, the index has nosedived 8.5%! The S&P 500 lost 1.0%, but the Dow Jones Industrial Average slipped “only” 0.4%. The small-cap Russell 2000 and S&P Midcap 400 indices declined 0.7% and 1.5% respectively. Like the prior day, all the main stock market indexes finished at their intraday lows.
In both the NYSE and Nasdaq, total volume came in 6% lower than the previous day’s levels. The Veteran’s Day holiday may have been a factor in the slightly lower turnover. Nevertheless, trading remained above 50-day average readings. The adv/dec volume ratios were on par with the previous day’s internals. Declining volume in the Nasdaq exceeded advancing volume by 3 to 1, while the NYSE margin was negative by only 2 to 1. Yesterday’s price action again had the feeling of steady selling, as opposed to panic dumping of shares. This was confirmed by the only moderately negative adv/dec ratios. Unfortunately, this means we have not yet seen the extremely negative levels necessary in order to put in a market bottom.
Closing our only open ETF position and initiating two new ones, yesterday was a rather active day for us. Since we’re being conservative with new trade entries, focusing only on specific industry sectors, we took advantage of the breakdown and relative weakness in the Oil-related sectors yesterday. Free-falling 5.9%, the Oil Service Index ($OSX) was one of the biggest losers of the primary industry sectors we follow. The sister Oil Index ($XOI) shed 3.6%. Both indexes suffered significant technical damage, as they sliced through their 50-day moving averages and broke support of their three-month uptrending channels.
In the pre-market yesterday, we noticed that many leading oil stocks were positioned to gap down on the open. Because both oil indexes were barely clinging to support of their 50-day MAs and uptrending channels, we anticipated the opening weakness would lead to further losses throughout the session. As such, we sent an intraday e-mail alert to subscribers, informing them of our plan to buy the inversely correlated UltraShort Oil and Gas ProShares (DUG) on the open. As with all of the ProShares UltraShort ETFs, DUG moves in the opposite direction of its underlying stocks, enabling investors of non-marginable accounts to take a bearish position without selling short. The daily chart of DUG below illustrates yesterday’s breakout above convergence of its 50-day MA and primary downtrending channel. Notice how flipping the chart of DUG upside down would basically give you the same chart patterns that the Oil and Oil Service Indexes have formed. Many of the UltraShort ETFs have the exact opposite chart patterns of their underlying indexes:
Since DUG closed at its intraday high, the position is already showing an unrealized gain of 2.3 points from our entry on the open. Our protective stop is currently just below the 50-day MA, but we will be trailing it higher in the coming days. With the clear relative weakness the oil and oil service sectors began exhibiting yesterday, this may be one of the best sectors to be short right now. In the event of a broad-market bounce, indexes with relative weakness typically rally a much lower percentage than the major indices, if at all. But if the broad-based weakness continues, oil and oil service could be expected to lead the way lower, at least in the short-term.
In our hedge fund, we also realized solid profits from short positions in several stocks of the S&P Metals and Mining Index ($SPSIMM), which tumbled 5.7% yesterday. The S&P Metals and Mining SPDR (XME), an ETF that mirrors the price action of $SPSIMM, suffered technical damage similar to the oil and oil service ETFs. Take a look:
Though we did not “officially” enter XME as a short position, any rally towards new resistance of its 50-day MA would present a low-risk entry point for short selling this bearish trend reversal. Support of the 200-day MA ($60.73) is a technical element to be aware of, but in the current environment, many indexes are breaking below their 200-day MAs without putting up much of a fight.
Over the past month, we have discussed the relative strength in the India Index (INP) on several occasions. Yesterday, INP finally provided us with a low-risk entry point by pulling back to support of its three-month uptrend line. Given that the four-day retracement was on relatively light volume, it does not appear that institutions were heavily selling the ETF during its correction. Showing the most relative strength of all the international ETFs, we also like that INP is not directly correlated to the direction of the U.S. markets. Consider, for example, that despite yesterday’s 1.0% drop in the S&P 500, the Bombay Stock Exchange actually gained 1.6% in the overnight session that followed. This should have a positive effect on the price of INP today, which we bought on a pullback to its trendline yesterday:
Finally, we covered our short position in the Mexico Index (EWW) near its intraday low, netting a gain of 6.7% (3.9 points) since our short entry four sessions ago. EWW has not yet reached our original downside target and may continue to head south in the intermediate-term. However, it has trended straight down since breaking its 200-day MA on November 7. In the short-term, it is reasonable to expect a retracement at least half way up to its 200-day MA. Rather than holding our short through an eventual bounce, we made the decision to take the profit and watch for a potential short re-entry on any decent counter-trend retracement.
In the broad market, the Nasdaq Composite closed just above its 200-day MA. Though the index may attempt to breach the 200-day MA on an intraday basis, this major support level should provide an impetus for some sort of relief rally. We certainly would not be looking to aggressively buy stocks or ETFs on any rally attempt, but advanced traders might consider very short-term momentum trades on the long side. Beaten-down sectors such as Financials and Retail could be bought with a 1 to 3 day time horizon, but tight trailing stops are a necessity! Alternatively, one might be just as wise to sit on the sidelines, waiting for the market to present its next clear short selling opportunities on any rally into key resistance levels. Of course, we’ll continue providing them to subscribers as we see them.
Today’s Watchlist:
There are no new setups in the pre-market today, but intraday e-mail alerts will be sent if/when we enter anything new. Due to the current period of high volatility, we’re finding it safer to make intraday decisions for trade entries, rather than listing them here in the pre-market. On our radar right now is a potential short entry in XME.
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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DUG long (250 shares from November 12 entry) – bought 42.43 (avg.), stop 40.88, target 50.30, unrealized points + 2.32, unrealized P/L + $580
INP long (150 shares from November 12 entry) – bought 80.75, stop 75.67, target new high (will trail stop), unrealized points (1.95), unrealized P/L ($293)
Closed positions (since last report):
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EWW short (300 shares from November 7 entry) – sold short 57.95, covered 54.04, points + 3.91, net P/L + $1,167
Current equity exposure ($100,000 max. buying power):
- $23,008
Notes:
Per intraday e-mail alert, we covered our EWW short position into weakness, near yesterday’s low. We also bought DUG on the open, and INP on a pullback to its primary uptrend line. Note that we have already trailed the DUG stop higher, just below the breakout pivot, in order to remove some risk from the trade.
Edited by Deron Wagner,
MTG Founder and
Head Trader