For the first time in exactly one month, the major indices registered gains for two consecutive days. Implications of further rate cuts by the Fed stoked the bulls in the pre-market, causing stocks to gap open significantly higher. This time, the opening gains held firm, setting in motion a steady intraday uptrend that lasted the whole day. The Nasdaq Composite zoomed 3.2%, the S&P 500 2.9%, and the Dow Jones Industrial Average 2.4%. The small-cap Russell 2000 and S&P Midcap 400 indices were higher by 3.6% and 3.0% respectively. Showing no signs of profit taking into the close, the main stock market indexes finished near their intraday highs.
As with Tuesday’s gains, volume increased across the board. Total volume in the NYSE ticked 6% higher, while Nasdaq turnover came in 9% above the previous day’s level. The second straight “accumulation day” for the S&P and Nasdaq was a positive sign that mutual funds, hedge funds, and other institutions have begun testing the waters on the long side of the market, at least in the near-term. One key difference between the gains of yesterday and the prior day is that yesterday’s buying was more broad-based, not confined to only the industries bouncing off their lows. Every major industry sector we monitor closed in the black, and leading stocks also scored powerful gains for a change. The bullish advancing/declining volume ratios confirmed the positive breadth. Advancing volume in the NYSE trounced declining volume by nearly 20 to 1. The Nasdaq ratio was firmly positive at nearly 8 to 1.
While many industry sectors are now bouncing off their lows, or are mid-trend within their primary downtrends, the DJ Utilities Average ($DJU) is about to break out to a new high. Yesterday’s gain caused the $DJU to close at the top of its recent consolidation, so a rally above yesterday’s highs should lead to a new recent high in the index. This is illustrated on the daily chart of the $DJU below:
We have been long the iShares DJ Utilities Average (IDU) since the $DJU Index broke out above its three-week downtrend line on November 19. Presently, the trade is showing an unrealized gain of 1.5 points, but the potential is much greater if the $DJU surges above its recent consolidation. Since the Utilities sector is defensive in nature, IDU showed relative strength by holding firm throughout the market’s recent weakness. Further, the regular dividend distributions of IDU are an added bonus. Although utilities may be a bit “boring” to trade, the goal of our hedge fund is to generate consistent monthly profits with minimal risk, not entertainment. Your personal trading business should be treated the same way, regardless of account size.
The India Index (INP), which we analyzed in yesterday’s newsletter, popped nearly 4% to a new all-time high. It closed near the middle of its intraday range, but still above the pivot of its breakout. As we have been discussing, this was a good example of how stocks and ETFs that don’t drop with the overall market are the first to rip to new highs when the broad market eventually bounces. Conversely, the strength in the Nasdaq prevented the bullish consolidation in the inversely correlated UltraShort QQQ ProShares (QID) from following-through to the upside. However, the buy setup never triggered for entry by moving above the high of its consolidation, so there was no damage done. Again, always having patience to wait for the proper trigger points in both long and short trade setups is the key to increasing your win/loss ratio.
In yesterday’s Wagner Daily, we said that, “Before even thinking about the long side of the market, we would first need to see at least one of the major averages close above its November 26 high. Such action would lead to a good possibility of an intermediate-term bounce within the context of a primary downtrend.” Within the first thirty minutes of yesterday’s trading, all the major indices had surged above their respective November 26 highs. This action caused the S&P 500 to firmly break out above its four-week downtrend line, triggering a bullish change of sentiment in the near-term technical picture. Further intraday gains quickly followed.
Can we say that the stock market has formed a definite bottom? Not exactly. In the short to intermediate-term, the overall market bias is now likely to favor the bullish side. However, astute traders must always keep the big picture in perspective. The S&P 500, Nasdaq Composite, and Dow Jones Industrial Average have each completed a 38.2% Fibonacci retracement of their ranges from the October highs to the November lows. In strongly trending markets, the range between the 38.2% to 61.8% retracement levels often marks the maximum counter-trend move before the dominant trend resumes. In addition to resistance of the Fibonacci retracements, both the 50 and 200-day moving averages will provide formidable overhead resistance. These closely-watched moving averages, as well as the Fibonacci retracement lines, are illustrated on the daily chart of the S&P 500 below. Yesterday’s S&P 500 breakout above the intermediate-term downtrend line is also annotated by the descending blue line:
In the coming days, pay attention to whether or not the broad market continues to exhibit bullish behavior by showing strength in leading stocks, avoiding sessions of higher volume selling, and closing near its intraday highs. As long as it does, it’s relatively safe to take advantage of the favorable conditions through buying stocks and ETFs with relative strength to the major indices. However, consider taking profits quicker than usual and/or reducing your share size, as the major indices still remain in dominant downtrends. Remember that the Nasdaq Composite scored its biggest percentage gain of the year on November 13 (3.4%), but fully all of that day’s gain vanished just four days later. The current bounce should last significantly longer, but it’s foolish to expect a complete recovery of the market’s recent losses when the major indices have only retraced a little more than a third of their total losses from the highs.
There are no new setups in the pre-market today. Since our near-term bias has changed to cautiously bullish, we will now be looking for potential long entries in ETFs that exhibit relative strength as they pull back to support. We’re holding off on new short entries for the near-term, but will be keeping potential setups on our radar, since the dominant trend remains down. As always, we will promptly send an intraday e-mail alert if/when we enter anything that catches our eyes intraday.
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):
IDU long (300 shares from November 19 entry) – bought 101.09, stop 99.68, target new high (will trail stop), unrealized points + 1.57, unrealized P/L + $471
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
We have trailed the IDU stop slightly higher, to just below the November 27 low and 50-day MA. If it violates that level, the current breakout attempt will have failed. The QID long setup did not trigger and has been removed from our watchlist.
Edited by Deron Wagner,
MTG Founder and