Stocks gapped higher out of the starting gate last Friday morning, but resistance of the S&P 500’s 200-day moving average immediately reversed the opening momentum. The major indices subsequently drifted gently lower throughout the day before finishing with mixed results. Despite giving up about half of its opening gain, the S&P 500 still ticked 0.8% higher. The Dow Jones Industrial Average similarly gained 0.5%. A pullback in tech caused the Nasdaq Composite to slip 0.3%, but the small-cap Russell 2000 and S&P Midcap 400 indices rallied 0.2% and 0.7% respectively. Each of the main stock market indexes closed in the bottom third to half of their intraday ranges.
Turnover swelled across the board, causing the Nasdaq Composite to register a bearish “distribution day.” Total volume in the Nasdaq grew by 17%, while volume in the NYSE surged 40% above the previous day’s level. The higher volume gain in the S&P technically counted as a bullish “accumulation day,” but the weak intraday price pattern more closely resembled selling into strength than institutional buying. Advancing volume in the NYSE exceeded declining volume by nearly 3 to 1, a firmly positive spread. The Nasdaq adv/dec volume ratio was negative, but only by a margin of 3 to 2.
The U.S. dollar finally began to strengthen last week, causing a pullback in the CurrencyShares Euro Trust (FXE), which mirrors the price of the euro/dollar. For the first time since the current parabolic uptrend began in early September 2007, FXE closed below support of its 20-day EMA. This means we may see further strength in the dollar this week, which could lead to FXE correcting down to support of its 50-day MA. The daily chart of FXE below is a great example of how well the 20-day EMA provides support in steadily trending stocks and ETFs. Until last Friday, notice how every touch of the 20-day EMA immediately led to a resumption of the strong uptrend:
Advanced traders capable of managing quick short sales may consider a trade to take advantage of near-term downward momentum in FXE. However, whenever a stock or ETF is trading above its 50-day MA, upward reversals in the direction of the primary trend can be sudden and swift.
In last Friday’s commentary, we discussed the relative strength in the Biotech Index ($BTK), as well as a few of the Biotech ETFs. On a similar note, we’ve noticed a lot of relative strength in the broader healthcare sector, as well as the primarily large-cap Pharmaceutical Index ($DRG). While the major indices are still well off their October highs, the Pharmaceutical HOLDR (PPH) has already recovered back to test its October high. A rally above last Friday’s high will cause PPH to break out above its prior high, triggering a potential buy entry for at least a short-term trade. The target would be resistance of the 52-week high, which was set back in May. The setup is illustrated on the weekly chart of PPH below:
Now that the Fed has given the impression of another rate cut at its December 11 meeting, it will be interesting to see how well the market retains last week’s gains. Recent interest rate cuts have generated positive knee-jerk reactions in the market that quickly faded. Given last week’s impressive bounce off the lows and rally into key resistance levels, a mild pullback this week would not surprising. But in order for the current rally attempt to have legs, the major indices should not retrace more than about one-third to one-half of last week’s gains. If a retracement deeper than 50% occurs, overall momentum could quickly shift back to the downside. We approach the new week with a slightly bullish near-term bias, keeping in mind that the long-term downtrends remain intact.
As per the commentary above, we are stalking PPH for a potential long entry. We are also watching XBI for a potential re-entry. However, we first want to assess broad market conditions instead of listing the setup in the pre-market. We will promptly send an intraday e-mail alert if/when we enter PPH, XBI, or anything else that comes across our radar. For now, our only open position is the IDU long.
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 + 1.66, unrealized P/L + $498
Closed positions (since last report):
XBI long (300 shares from November 30 entry) – bought 61.41, sold 61.10, points (0.31), net P/L ($99)
Current equity exposure ($100,000 max. buying power):
There was some confusion as to whether XBI actually triggered last Friday morning, or if the MTG Opening Gap Rules prevented it from doing so.
Technically, XBI opened at $61.00, but it quickly moved to $61.41 just one minute and three trades later. The real opening should have been around $61.41, which would have triggered the gap rules and adjusted the entry price to $61.51. XBI would subsequently NOT have triggered for entry. However, it is sometimes a bit tricky when rogue opening trades affect where the opening price actually SHOULD HAVE been.
If you counted the open at $61.41 instead of $61, you probably never entered the trade in the first place, but we went with the official opening tick of $61. As such, the trade was “officially” be counted as triggered, though it should not have triggered in actuality. With the adjusted stop we sent per intraday e-mail alert, it was basically a scratch (gain or loss below $100) anyway. In the near future, we plan to modify our opening gap rules to account for these rogue opening prints outside the market. Apologies for any confusion.
Edited by Deron Wagner,
MTG Founder and