Stocks wrapped up last week’s whippy session on a negative note, as the broad market closed at its worst level of the week. The major indices gapped lower on last Friday’s open, then tried to recover throughout the morning, but stocks stalled as they tested their previous day’s highs. The main stock market indexes settled into a steady downtrend that persisted throughout the afternoon. By the closing bell, support of their prior day’s lows was broken. The Nasdaq Composite lost 1.2%, the Dow Jones Industrial Average 1.3%, and the S&P 500 1.4%. As has been the case since at least early October, small and mid-cap stocks showed relative weakness. The Russell 2000 and S&P Midcap 400 indexes fell 2.0% and 1.6% respectively. The major averages closed at their worst levels of the day and week.
Turnover declined for the third straight day. Total volume in the NYSE receded 13%, as volume in the Nasdaq trickled in 10% below the previous day’s level. Trading activity in both exchanges was well below average levels, but market internals were not encouraging. Declining volume in the NYSE beat advancing volume by a margin of nearly 6 to 1. The Nasdaq adv/dec volume ratio was better, negative by just over 2 to 1. As the holiday season is kicking in full swing, it’s logical to expect reduced participation on the part of traders and investors until after the new year.
Our short position in the iShares Xinhua China 25 (FXI) is working out quite well. As of last week’s close, the trade is showing an unrealized gain of 12.5 points (6.8%) since our December 12 short entry. Following overnight weakness in the Shanghai Index, FXI is poised to gap approximately 5 points lower on today’s open. Our original downside price target in FXI was $163.60, just a few cents above the prior low from November. However, we plan to cover the position on today’s open and lock in a quick gain of 17 – 18 points, rather than getting greedy and risking a significant bounce from here.
Two weeks ago, we pointed out that a bounce in the U.S. Dollar was causing the CurrencyShares Euro Trust (FXE) to inversely retrace from the high of its impressive rally. Since the 20-day EMA initially held as support on the pullback and the 50-day MA was further below, it was too early to consider FXE for short entry. Last Friday’s big gap down below the 50-day MA changed that. For the first time in more than three months, FXE is now trading below its 50-day MA. Further, support of its 4-month uptrend line has been broken. With that prior uptrend line now acting as the new resistance level, any rally attempt into that prior uptrend line will present a low-risk short entry in FXE. We’ll be stalking it for potential short entry in the coming days. The setup is illustrated on the daily chart below:
Going into the beginning of last week, a handful of industry sectors were showing relative strength by consolidating near their highs, but each began rolling over with the broad market at week’s end. Utilities, Pharmaceuticals, and even the Oil sectors have all come under near-term selling pressure. In last Friday morning’s Wagner Daily, we highlighted the setups for potential breakouts in the Oil Service HOLDR (OIH) and S&P Energy SPDR (XLE), but both ETFs fell sharply later that day. Fortunately, neither ETF traded above the previous day’s high. Such action would have triggered a potential long entry that would have immediately failed. Simply put, bullish follow-through and momentum has seriously been lacking.
The S&P 500 finally broke away from the magnetic pull of its 200-day MA last Friday, closing firmly below it. The index also finished below near-term support of its three-day low, but only by a marginal amount. More important than last week’s low is the December 4 low of 1,460, as that marks support of the last “swing low.” As long as the S&P holds above that level, we cannot declare the uptrend off the November lows is dead. Nevertheless, a firm close below that level, just 0.5% below the current price of the S&P 500, would break the newly established pattern of “higher highs” and “higher lows.” Expect traders to be closely focused on that 1,460 level in the coming week. On the upside, resistance of both the 50 and 200-day moving averages looms overhead. Key support of the December 4 low is annotated below:
This week, three behemoth financial companies are scheduled to report their latest quarterly earnings. As this week’s reports from Goldman Sachs, Bear Stearns, and Morgan Stanley may shed more light on the current state of the credit liquidity concerns, expect the stock market to be volatile on the heels of their earnings announcements. Goldman Sachs kicks off the fun with their pre-market report tomorrow morning. The combination of these earnings reports and anticipated light volume ahead of the upcoming holidays provides solid reasons to continue laying low with new position entries until the new year.
There are no new setups for today in the pre-market, although we are watching FXE for a potential bounce into resistance of its prior uptrend line. If/when it does, we may initiate a new short position via intraday e-mail alert. Otherwise, we will simply enjoy the solid gains locked in throughout the month, patiently waiting for the market to decisively show its hand.
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):
FXI short (100 shares from December 12 entry) – sold short 184.01, stop 191.68, target 163.60 (see note below), unrealized points + 12.51, unrealized P/L + $1,251
PPH long (300 shares from December 4 entry) – bought 82.03, stop 80.31, target 86.38, unrealized points (1.02), unrealized P/L ($306)
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
Because FXI has fallen so quickly since our entry and is gapping down again in today’s pre-market, we are making a judgment to call to cover the short position on the market’s open. It will probably open near our original target anyway, so no need to risk holding through a potential bounce when we have already gained more than 12 points in just a few days. We will send an intraday e-mail alert to confirm when we have locked in profits on the FXI position, but we plan to do so right on today’s open.
Edited by Deron Wagner,
MTG Founder and