Commentary:
Bearish momentum from the market’s September 4 plunge spilled over into the morning of last Friday’s session, but stocks later stabilized and reversed, enabling the major indices to finish with mixed results. The S&P 500, down 1.5% at its morning low, rallied to finish with a 0.4% gain. The Dow Jones Industrial Average similarly bounced 0.3%. The Nasdaq Composite settled with a 0.1% loss, but the index was actually down 1.9% at its worst level of the day. The small-cap Russell 2000 was unchanged, as the S&P Midcap 400 advanced 0.4%. After reversing from near-term “oversold” conditions in the morning, each of the main stock market indexes closed the day near its intraday high. Nevertheless, all the major indices registered sharp losses for the week.
Total volume in both the NYSE and Nasdaq slipped 4% below the previous day’s levels. Still, trading remained above average levels for a second straight day. Market internals were very ugly in the beginning of the day, but improved substantially as the day progressed. By the closing bell, advancing volume in the NYSE had narrowly exceeded declining volume by a margin of 3 to 2. The Nasdaq adv/dec volume ratio remained marginally negative.
After nearly a month of choppy, range-bound trading, the broad market decisively broke lower, below key support levels, on September 4. While this may have been bad news for traditional “buy and hold” investors, it was good news for astute short- and intermediate-term traders who focus on profiting from market trends in either direction. Stocks followed up that major sell-off by closing flat to marginally higher the following day (last Friday). Going into today, this sequence of price action initially positioned the main stock market indexes for a bounce into new resistance of their prior lows from August, which they fell below last week. But just when the stock market was about to present us with ideal short-sale opportunities, the Fed curiously announced, over the weekend, that troubled mortgage lenders Fannie Mae and Freddie Mac will be taken over by the U.S. government. Upon reacting to this interesting news, the S&P and Nasdaq futures markets rocketed nearly 3% higher on Sunday evening, and have been hanging out around those levels overnight. Unless something substantially changes over the next few hours, all the major indices will open 2% to 3% higher today.
In last Friday’s commentary, we said we would analyze the charts of the main stock market indexes today, in order to determine the most ideal short entry points in the coming week. However, as of now, the major indices are already poised to open well above their resistance levels of the August lows. The S&P and Dow are even positioned to open above their 20 and 50-day moving averages. Obviously, the Fed pretty much threw a wrench in our clear plan, and there was no way to anticipate such action.
Given the circumstances, it would now be a moot point to spend much time looking at resistance levels and potential short entry points before seeing the outcome of today’s session. The annotated daily chart of the S&P 500 explains why this is the case:
Will last week’s plunge turn out to be a failed breakdown, or will today’s pre-market enthusiasm vanish just as quickly as it appeared? Who knows? The only thing we know for certain is we’re forced to once again revert to “wait and see” mode, at least for a day or two. Fortunately, we only have two open ETF positions, one bearish (SMN) and one with little correlation to the direction of the stock market (FXE). Given the situation, we’re glad to have been waiting for a bounce after last week’s breakdown before deciding to get more aggressively short.
Frankly, I don’t see how a financial disaster of such proportions as Fannie and Freddie can be considered good news by the market, as the Fed is now committed to putting as much as 100 billion dollars into each entity. Nevertheless, I’ve learned over the years that the market doesn’t care about my opinion, or anyone else’s for that matter. That’s why I manage my hedge fund under the mantra of trade what I see, not what I think! If the market manages to hold on to today’s opening gap throughout the entire day, we have no problem relinquishing our near-term bearish bias. But the “smart money” will undoubtedly want the market to prove it by waiting to see whether today’s opening gap is just a knee-jerk reaction that will quickly fade away, or if it could be the start of something much more positive, at least in the near- to intermediate-term.
As a final thought, if you got stuck with any losing long positions because of last week’s sell-off, you may want to view today’s opening gap as a gift, and sell into strength. If both the opening gap and your long positions hold firmly through the final minutes of trading, you can always re-enter, and with much less risk. As for entering new short positions, all bets are off until we see the final outcome of today’s session. We’ll re-assess with our updated thoughts and potential ETF plays in tomorrow’s commentary, but we’re going to play it conservatively in “wait and see” mode until then.
Today’s Watchlist:
As per the commentary above, we are back to “wait and see” mode with regard to new ETF positions. Over the next few days, the market will show us whether the strong reaction to the Fannie/Freddie news was just a short-lived fluke, or the start of something much more positive for the stock market. As always, we’ll promptly send an Intraday Trade Alert if/when we enter anything new.
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. Please review the Wagner Daily Subscriber Guide for important, automatic rules on trigger and stop prices.
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Open positions (coming into today):
- Per Intraday Trade Alert, we bought SMN late Friday afternoon when it pulled back to support of its 20-EMA on the hourly chart. This was our original plan, as per the commentary in the September 5 issue of The Wagner Daily. With today’s strong opening gap up in the futures market, remember to use the MTG Opening Gap Rules to manage the SMN position if it opens below our stop price. If it does, we’ll keep you updated of our trade management via Intraday Trade Alert.
- Reminder to subscribers – Intraday Trade Alerts to your e-mail and/or mobile phone are normally only sent to indicate a CHANGE to the pre-market plan that is detailed in each morning’s Wagner Daily. We sometimes send a courtesy alert just to confirm action that was already detailed in the pre-market newsletter, but this is not always the case. If no alert is received to the contrary, one should always assume we’re honoring all stops and trigger prices listed in each morning’s Wagner Daily. But whenever CHANGES to the pre-market stops or trigger prices are necessary, alerts are sent on an AS-NEEDED basis. Just a reminder of the purpose of Intraday Trade Alerts.
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FXE long (250 shares from September 4 entry) –
bought 143.36, stop 140.83, no target (will trail tight stop), unrealized points = (0.90), unrealized P/L = ($225)
SMN long (200 shares from September 5 entry) –
bought 41.29, stop 37.72, target 49.70, unrealized points = (0.29), unrealized P/L = ($58)
Closed positions (since last report):
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(none)
Current equity exposure ($100,000 max. buying power):
- $43,815
Notes:
Edited by Deron Wagner,
MTG Founder and
Head Trader