Commentary:

Driven by enthusiasm for Microsoft’s latest quarterly earnings, stocks opened sharply higher last Friday morning, but traders quickly took advantage of the situation by selling into strength. The major indices fell to unchanged levels within the first ninety minutes of trading. Selling pressure continued into the afternoon, causing the main stock market indexes to give back their previous day’s gains and then some. The Nasdaq Composite surrendered its 2.0% opening gain to close 1.5% lower. The S&P 500 shed 1.6% and the Dow Jones Industrial Average lost 1.4%. Small and mid-cap issues held up pretty well. The Russell 2000 and S&P Midcap 400 declined 0.6% and 0.9% respectively. After more extremely wide trading ranges, all the major indices settled near their intraday lows.

Although last Friday’s price action was ugly, it’s positive that the losses occurred on lighter volume. Total volume in the NYSE receded 12, while volume in the Nasdaq was 11% below the previous day’s level. The lower turnover tells us the losses were more the result of the bulls taking a break from the recent buying than heavy selling on the part of institutions. In both exchanges, declining volume exceeded advancing volume by a margin of 5 to 2, indicating substantial, but not massive, selling pressure.

The S&P Homebuilders SPDR (XHB) may be in play for intermediate-term traders and investors this week, as it began to reverse an eight-month downtrend last week. Showing great relative strength, XHB bucked the trend by edging higher while the broad market sold off in the first half of last week. When the major indices subsequently rallied on January 23, XHB rocketed more than 10% that day, breaking resistance of its pivotal 50-day moving average in the process. The weekly chart of XHB below show the breakout above its eight-month downtrend line. The daily chart that follows illustrates the breakout above its 50-day MA and next resistance of its 200-day MA:

Because of the recent relative strength XHB has exhibited, it’s a relatively low-risk long play in the coming week. We like it for long entry over the high of its two-day consolidation, though it may need a few more days to digest last week’s gains before making another leg up. News out of the housing market continues to be quite negative, but it seems the bad economic news is already built into the price of this sector. If playing XHB in the realistic expectation of an intermediate-term trade, resistance of the 200-day moving average makes an ideal price target. Not only is the 200-day MA quite difficult for a downtrending stock or ETF to overcome, but that level ($25.77) also equates to resistance of the 50% Fibonacci retracement from the May high down to the January low.

In last Friday morning’s Wagner Daily, we said of the day’s anticipated price action that, “After zooming more than 7% off its lows without a rest, one should definitely consider the potential of a significant pullback today. . .If you’re still carrying long positions that you somehow failed to unload during the recent slaughtering, it would be prudent to sell them into strength of today’s open.” If you heeded our advice by unloading any long positions into the open, you’re sitting pretty now. Just like mid-January, the 10-day moving average stopped the initial rally attempt in all the main stock market indexes.

We still believe last Friday’s pullback was a short-term shakeout, and the major indices will attempt to rally above last week’s highs in the coming days. Whether or not they actually manage to do so is another story, but we should at least expect a valiant attempt to set a “higher higher” this week. Specifically, we’ll be looking to see how the S&P, Nasdaq, and Dow react upon testing their 20-day exponential moving averages, a more significant resistance level than the 10-day MAs. When the buying momentum begins to dry up on the next rally attempt, that is the point where we will look to initiate new short positions on ETFs that have rallied into solid resistance levels. In the event that stocks just continue lower without trying for a “higher high,” we still may consider new short entries, but with reduced share size and a very short-term time horizon. Firm support of new “swing lows” established on January 23 mandate this.

---

Today’s Watchlist:

There are no new setups in the pre-market today. High volatility in the current market has caused us to enter many of our positions via intraday e-mail alert, as opposed to listing pre-market entry prices. As always, we will promptly send an alert if/when we spot anything new. On the long side, we are watching the price action in XHB for potential long entry, but still favor the short side of the market more.

---

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):
(none)

Closed positions (since last report):

(none)

Current equity exposure ($100,000 max. buying power):

$0

Notes:


We are currently “flat and happy,” stalking for the next ideal trading opportunity.

Click here for a free trial to Morpheus Trading Group’s other newsletter services.
Please check out the Wagner Daily Subscriber Guide to learn how to get the most from your subscription.

Edited by Deron Wagner,
MTG Founder and
Head Trader