Commentary:

Weak action throughout most of yesterday’s session shook out a lot of bulls, but a wave of buying in the final hour lessened the bearish tone. The Nasdaq Composite shed 1.1%, the S&P 500 0.8%, and the Dow Jones Industrial Average 0.4%. Small and mid-cap stocks that have showed significant relative strength in recent weeks finally pulled back. The Russell 2000 and S&P Midcap 400 indices were lower by 1.9% and 1.6% respectively. Each of the main stock market indexes closed in the bottom third of their intraday lows, but off their worst levels of the session.

Total volume in the Nasdaq increased 12% above the previous day’s level, but turnover in the NYSE rose by only 1%. The Nasdaq’s loss on higher volume was a “distribution day,” indicative of institutional selling. However, most leading stocks dropped only moderately. A few even ignored the broad market weakness and powered higher, a positive sign for the overall market. Market internals were negative, but not that ugly. Declining volume in the Nasdaq exceeded advancing volume by a margin of just under 3 to 1. The NYSE ratio was negative by less than 4 to 1.

The downtrend that persisted throughout most of the day caused the S&P and Nasdaq to fall below support of their ranges of consolidation that had formed over the preceding five sessions. This undoubtedly triggered many traders’ protective stop orders that were set below the recent trading ranges. Both the iShares Transportation (IYT) and iPath India Index (INP) hit our trailing stops, but the losses were minimal because we had raised the stop levels to just below our entry prices.

On the surface, yesterday’s session might quickly be interpreted as negative, but a closer look at the technicals reveals a different paradigm. At its intraday low, the Nasdaq Composite touched support of its 20-day exponential moving average. The S&P and Dow similarly came within close proximity of their 20-day EMAs. The late-day rally subsequently enabled all the major indices to close at support of their uptrend lines that began with the March 17 lows. Further, the indexes also finished at or very near support of their 10-day moving averages. In steady uptrends, a touch of the 10-day MA often provides the impetus for stocks to resume their upward momentum. This confluence of support is shown on the daily chart of the S&P 500 below:

On the chart above, notice how the S&P bounced off support of its four-week uptrend line. The Dow did the same, while the Nasdaq basically closed right on its uptrend line. The S&P settled right at support of its 10-day MA (the dashed purple line). When the index pulled back at the end of March, it closed below its 10-day MA on March 28, quickly moved back up on March 31, then ripped to a new near-term high on April 1. The 10-day MA often has this effect in developing trends. This time around, the pullback to the 10-day MA is even better because both the 20 and 50-day MAs are below the current price of the S&P. When the S&P touched its 10-day MA in late March, the index still had to deal with overhead resistance of both its 20 and 50-day MAs. Conversely, both moving averages are now acting as support, right in the vicinity of the four-week uptrend line. It’s also the same positive scenario with the Dow and Nasdaq.

Despite the fact we closed two open positions yesterday, we felt the S&P and Nasdaq’s pullback to their uptrend lines and 10-day MAs provided a low-risk buying opportunity for select ETFs. As such, we bought the Ultra QQQ ProShares (QLD) when it approached support of its 20-day EMA. It subsequently closed a bit above our entry price. The shorter-term intraday chart shows how QLD reversed to close above resistance of its hourly downtrend line. This should set a bullish tone going into today’s session:

In addition to buying QLD via Intraday Trade Alert to subscribers, we also re-entered the iShares Xinhua China 25 (FXI) as it retraced to support of its 50-day MA. Recall that we sold FXI into strength on April 7, netting a 6.6 point gain. In the following day’s Wagner Daily, we said of FXI, “Although we only entered the trade on April 2, we made a judgment call to take profit because we are not interested in holding through a correction. Since it has rallied more than 20% off its low in just two weeks, a pullback is likely in the near-term. After it consolidates or pulls back, we can simply re-enter FXI if it still looks good.” As anticipated, the correction began the following day. Discipline to sell into strength and patiently wait for yesterday’s decent pullback enabled us to buy back into FXI near our original April 2 entry price. The big benefit is we have already secured a gain of nearly 7 points in the process.

One might argue that buying yesterday’s pullback was “risky,” but the plethora of support levels made it a well-defined risk with a positive risk/reward ratio. In this business, taking precisely calculated risks is what we get paid for! Traders who continually wait until risk seems non-existent are usually too late to the party and frequently call a market top. With many of the “weak hands” now washed out of the broad market, there is less overhead supply for stocks to contend with if a rally attempt comes today or tomorrow. Put another way, traders who were looking for a good excuse to sell their long positions have now done so. Therefore, less buying volume is required to push the major indices to new recent highs. Remember that quick “shakeouts” below obvious levels of support can be bullish, just as long as they’re quickly followed up with higher volume rallies. Long-term trends remain bearish, but the market has yet to prove the new intermediate-term uptrends are dead.

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Today’s Watchlist:

iShares Mexico Index (EWW)
Long

Shares = 300
Trigger = above 61.58 (over yesterday’s high)
Stop = 59.69 (below the 10-day MA and recent range)
Target = new high (will trail stop)
Dividend Date = n/a

Notes = This setup from April 8 did not yet trigger, but remains on our watchlist going into today. Note new share size and trigger price. See commentary in the April 8 issue of The Wagner Daily for explanation of this setup.

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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):
QLD long (400 shares from April 9 entry) – bought 73.79, stop 72.54, target 81.80, unrealized points = + 0.31, unrealized P/L = + $124

FXI long (150 shares from April 9 entry) – bought 143.50, stop 138.60, target 157.40, unrealized points = (2.59), unrealized P/L = ($389)

Closed positions (since last report):

IYT long (250 shares from March 25 entry) – bought 86.69, sold 85.87, points = (0.82), net P/L = ($210)

INP long (200 shares from March 24 entry) – bought 66.26, sold 65.18, points = (1.08), net P/L = ($220)

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

$50,776

Notes:


Per Intraday Trade Alert, we bought both FXI and QLD yesterday. The day’s weakness caused both INP and IYT to hit their stops. However, the losses were minimal because we trailed the stops higher shortly after entry, in order to protect against a failed consolidation. In order to withstand a “stop hunt” below the recent range, our IYT stop was intentionally a bit looser than necessary. It was surprising that IYT completely failed its consolidation and hit our stop, but the latest spike to new highs in crude oil probably didn’t help.

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Edited by Deron Wagner,
MTG Founder and
Head Trader