Resuming the bounce off the lows that began on January 23, most of the major indices recouped all of last Friday’s losses yesterday. Meandering higher throughout the session, the S&P 500 gained 1.8%, the Dow Jones Industrial Average 1.5%, and the Nasdaq Composite 1.0%. The small-cap Russell 2000 advanced 2.0%, as the S&P Midcap 400 rallied 2.3%. All the main stock market indexes finished at their intraday highs.
Lower overall turnover took a bit of luster off the rally. Total volume in the NYSE declined 16%, while volume in the Nasdaq eased 22% below the previous day’s level. It was the first time in more than three weeks that trading in the Nasdaq sank below 50-day average levels. Volume in the NYSE remained slightly above average. Market internals in the NYSE was overly positive, as advancing volume beat declining volume by a ratio of more than 6 to 1. The Nasdaq adv/dec volume ratio, however, was positive by only 2 to 1.
In yesterday’s commentary, we pointed out the potentially bullish setup in the S&P Homebuilder SPDR (XHB). Specifically, we liked it for a buying opportunity if it rose above the high of last week’s near-term consolidation. Though it actually closed above that level yesterday afternoon, another low-risk entry point was provided in the morning, when it fell to near new support of its prior downtrend line and 50-day MA. Rather than waiting for a rally above the two-day high, we sent an intraday e-mail alert to subscribers of The Wagner Daily yesterday, informing them of our decision to buy the morning pullback in XHB. It was a great decision to do so, as XHB subsequently found support at our entry price, then showed relative strength to the stock market throughout the rest of the session. By day’s end, XHB had zoomed more than 10% (2 points) above our morning entry price. The daily chart of XHB below illustrates our more aggressive entry point on the pullback:
With yesterday’s entry on the pullback, our protective stop is now below convergence of the 20 and 50-day moving averages, while the upside price target is near resistance of the 200-day moving average. This gives us an overly positive reward/risk ratio of more than 6 to 1. If the profit target is obtained, the position will have gained more than 6 points, but the stop level on the downside is just over 1 point. Anytime the reward/risk ratio of a setup is firmly higher than 2 to 1, we like the odds of entering the trade.
After stocks began rallying in the middle of last week, we suggested the likelihood of a pullback in the market to shake out the “weak hands” from the bounce, followed by an attempt to set “higher highs.” So far, that’s how the scenario is playing out. Yesterday’s rally quickly enabled both the S&P and Dow to recover all of last Friday’s losses, while the Nasdaq Composite nearly did the same. With support of a “higher low” having been established, we could expect the major indices to test resistance of their January 25 highs within the next several days. The market’s reaction to that test will determine our next short to overall moves in the market. Again, we expect stocks to rally above last week’s highs, attract the attention of happy-go-lucky buyers, and then realize significant selling weakness. As such, we remain lightly committed on the long side of the market. Our only long position is the relatively strong XHB. On the short side, we’ll be closely analyzing the market’s price action over the next several days, looking for clear signs of potential failure on the rally attempt. The upcoming Fed meeting on economic policy should further create volatility.
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. We still favor the overall short side of the market in the intermediate and long-term.
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):
XHB long (350 shares from January 28 entry) – bought 19.08, stop 17.25, target 25.60, unrealized points = + 2.35, unrealized P/L = + $822
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
Per intraday e-mail alert, we bought XHB on yesterday morning’s pullback. The trade is already showing us a solid unrealized gain.
Edited by Deron Wagner,
MTG Founder and