Commentary:
Showing no relief into the new year, institutional selling pressure caused the Nasdaq to suffer its fourth straight day of losses yesterday. Stocks opened slightly higher, but the bears quickly resumed control, setting in motion a steady downtrend throughout the morning. An afternoon rally attempt initially showed promise, but traders sold into strength shortly thereafter. The S&P 500 fell 1.4%, the Nasdaq Composite 1.6%, and the Dow Jones Industrial Average 1.7%. The small-cap Russell 2000 lost 1.6% and the S&P Midcap 400 shed 1.2%. A small bounce in the final fifteen minutes lifted the major indices off their worst levels, but they still closed in the bottom quarter of their intraday ranges.
The most negative aspect of yesterday’s sell-off was that volume spiked significantly higher as well. Total volume in the Nasdaq soared 44% above the previous day’s level, while turnover in the NYSE similarly surged 26%. In both the NYSE and Nasdaq, declining volume exceeded advancing volume by a margin of 7 to 2. The sharp losses on firmly higher volume constituted another “distribution day” in both exchanges. In recent weeks, it was the sixth day of institutional selling in the Nasdaq and the fifth in the NYSE. A strong market can typically absorb a few days of higher volume selling, but the presence of five or more within a month usually spells trouble for uptrends, especially fledgling ones.
From time to time, we remind traders about the importance of continually searching for industry sectors showing relative strength or weakness to the broad market. Doing so often enables one to find profitable trading opportunities regardless of the overall market trend. A great example of this was found in the Gold Index ($GOX), which impressively ignored yesterday’s broad-based losses and rocketed 6.7% higher. Spot gold zoomed to a new 20+ year high of approximately $850 per ounce, causing the StreetTRACKS Gold Trust (GLD) to correspondingly break out to a new high as well. Our long position in the Market Vectors Gold Miners ETF (GDX), comprised of a basket of individual gold mining stocks, enjoyed a 7.4% rally yesterday. The daily chart below shows the positive price action GDX has been exhibiting since our December 26 entry. The dashed horizontal line marks our profit target, which is a probe above resistance of the November 14 high:
Presently, our GDX position is showing a marked to market gain of 3.7 points. Showing strength in the pre-market, it is poised to open near our original profit target of $49.84. As such, we plan to sell into strength shortly after the open. Because of the low volume and indecision during the holiday period, we have only been carrying one open position. However, the profit from just GDX probably worked out much better than attempting to navigate the market’s recent chop would have.
Along with gold, spot crude oil rose to a new record high yesterday. A few days ago, we pointed out the bullish setup in the U.S. Oil Fund (USO), which was consolidating at its prior high. Yesterday’s strength led to our anticipated breakout in USO, although much of the gain was the result of an upside opening gap. The daily chart of USO below shows the breakout:
Prior resistance always becomes the new support after the resistance is broken. Therefore, the horizontal line shown on the chart above should now provide price support to USO on any pullback. The closely correlated Oil Service HOLDR (OIH) has been consolidating in a tight range for the past week and is also ready to breakout to a new high.
If OIH rallies above yesterday’s high, we plan to buy. Regular subscribers should note our detailed trigger, stop, and target prices for the OIH setup below. Aside from gold and oil, we presently see no other ETFs with overly bullish chart patterns. Conversely, numerous ETFs are starting to look tempting on the short side. We’ll be ready to pounce on those too, but we are now patiently waiting for a short-term rally into resistance of prior support levels that were recently broken. Selling short near current levels does not carry a very attractive risk/reward ratio, but waiting for an eventual bounce that fizzles out does.
Today’s Watchlist:
OIH – Oil Service HOLDR
Long
Shares = 100
Trigger = 194.22 (above yesterday’s high)
Stop = 190.22 (below the hourly uptrend line)
Target = new high (will trail stop)
Dividend Date = n/a
Notes = See commentary above for explanation of the setup.
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):
-
GDX long (300 shares from December 26 entry) – bought 45.52, stop 43.29, target 49.84 (see note below), unrealized points + 3.72, unrealized P/L + $1,116
Closed positions (since last report):
-
(none)
Current equity exposure ($100,000 max. buying power):
- $14,772
Notes:
GDX is poised to open near its profit target of $49.84. As such, we plan to sell into strength, at market, just a few minutes after the open.
Edited by Deron Wagner,
MTG Founder and
Head Trader