Commentary:
Much like navigating a mine field, stocks bobbed and weaved all over the place yesterday. When the closing bell finally came to save the day, most of the major indices had finished moderately lower. The Nasdaq Composite lost 1.0%, the S&P 500 0.6%, and the Dow Jones Industrial Average 0.3%. Small caps showed a bit of relative strength, enabling the Russell 2000 to gain 0.4%. The S&P Midcap 400 slipped 0.5%. All of the main stock market indexes finished just below the middle of their wide intraday ranges.
Aided by the 308 million share volume spike in Intel, total volume in the Nasdaq surged 43% above the previous day’s level. It was the most active day in the Nasdaq in more than two months. Turnover in the NYSE rose 18%, well above average levels. Despite the market’s losses, internals were slightly positive. In both the NYSE and Nasdaq, advancing volume marginally exceeded declining volume.
Lately, we’ve been discussing the close proximity of the S&P 500 to major support of its prior low from August 2007. Yesterday, the index dipped below that 1,370 level on an intraday basis, but finished a few points above it. More importantly, the S&P also closed right on support of its five-year primary uptrend line. This is shown on the long-term monthly chart below:
Every time the S&P has touched support of its long-term uptrend line in recent years, it bounced squarely off it, eventually rallying to new highs later. Will it do the same again or will the uptrend finally end this time? It’s obviously too early to tell, but there are two notable differences on the current test of support: high volume and “big red bars.” As you can see, volume has been much higher than average over the past several months, and is likely to come in much higher than average this month as well. This hints at real institutional selling beneath the surface of the price pattern. Second, previous pullbacks to the uptrend line have been gentle retracements that ended with the formation of monthly “hammer” candlestick patterns. This time, however, there is only a “big red bar” with no sign of a hammer yet. Whether or not downward momentum causes the S&P to break down, we can surely expect high volatility while the bulls and bears battle for control at this major area of support.
The Nasdaq monthly chart is looking a little better than the S&P, as it is still firmly above support of its long-term uptrend line. However, the index has fallen to major support of its prior highs from March and April of 2006. This level initially provided the impetus for the index to bounce in August of 2007, and may do the same this time:
The market’s recent volatility has prompted us to take a shorter than usual time horizon on recent trade entries. As with Tuesday’s downward resolution out of the short-term trading range, we were busy managing positions throughout yesterday’s swings. We closed our positions in the UltraShort Oil and Gas ProShares (DUG) and iShares Brazil Index (EWZ) when the stock market began to bottom late in the morning. Though we held each position only two days, both netted a gain of more than 3 points. Rather than risk sitting through a potential bounce in the broad market, we made a judgment call to quickly lock in gains in both. We also entered a new long position in the UltraShort Emerging Markets Pro Shares (EEV) when it began to break out above its prior high from December. The trade subsequently took off, leaving us with a marked to market gain of more than 3 points.
NOTE: The U.S. stock markets will be closed on Monday, January 21 in observance of Martin Luther King day. As such, The Wagner Daily will not be published that day. Regular publication will resume the following day.
Today’s Watchlist:
There are no new setups in the pre-market today.
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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EEV long (100 shares from January 16 entry) – bought 83.73, stop 75.89, target new high (will trail stop), unrealized points = + 3.32, unrealized P/L = + $332
PPH long (600 shares total – 400 from Jan. 15, added 200 on Jan. 16) – bought 81.38 (avg.), stop 80.20, target new high (will trail stop), unrealized points = (0.21), unrealized P/L = ($126)
Closed positions (since last report):
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DUG long (300 shares from January 15 entry) – bought 40.40, sold 43.55, points = + 3.15, net P/L = + $939
EWZ short (200 shares from January 15 entry) – sold short 75.95, covered 72.10, points = + 3.85, unrealized P/L = + $766
Current equity exposure ($100,000 max. buying power):
- $57,407
Notes:
High volatility kept us on our toes again, but we nevertheless had quite a profitable day. Per intraday e-mail alerts, we closed both DUG and EWZ near their best levels of the day. We also bought EEV and added to our PPH position. If you’re a new subscriber and have found our actions of the past two days a bit challenging to follow, don’t worry. Under less volatile market conditions, we normally stay in positions for weeks at a time, not days. However, micromanaging both long and short positions is the best and safest way to profit under current market conditions.
Edited by Deron Wagner,
MTG Founder and
Head Trader