Commentary:
As the U.S. Congress postured over the eventual terms of the Fed’s financial bailout package yesterday, stocks hinged on every word, bobbing and weaving their way throughout the session. After drifting lower at mid-day, the major indices briefly recovered into positive territory later in the afternoon, but selling pressure in the final thirty minutes of trading shoved stocks back into the red. The Nasdaq Composite lost 1.2%, the Dow Jones Industrial Average 1.5%, and the S&P 500 1.6%. The small-cap Russell 2000 fell 1.6%, as the S&P Midcap 400 declined 1.2%. Considering the stock market’s recent pattern of extremely wide intraday trading ranges, yesterday’s session seemed relatively quiet. However, it was disappointing that the main stock market indexes again finished at their worst levels of the day.
Turnover was mixed. Total volume in the NYSE eased 22%, marking a second consecutive day of losses on lower volume, but volume in the Nasdaq rose 7%, causing the index to register a bearish “distribution day.” In both exchanges, trading remained below 50-day average levels. Market internals were negative, but not as bad as the previous day’s levels. Declining volume exceeded advancing volume by approximately 3 to 1 in both the NYSE and Nasdaq.
Commodities enjoyed a stellar period of gains from August 2007 through July 2008, then entered into an inevitable correction that has been in place for the past two months. But if you haven’t checked out their chart patterns in a while, now is a good time to do so because the group is generally showing signs that the intermediate-term correction may soon be finished. To illustrate this, take a look at the daily chart of PowerShares DB Commodity Index Tracking Fund (DBC), which is comprised of a diverse variety of commodity index futures contracts:
Bearing little correlation to the major stock market indexes over the past week (a very good thing!), DBC has been trending steadily higher since bottoming on September 16. Over the past two days, while the broad market has been selling off, DBC has been holding in a tight, sideways range, right at its 20-day exponential moving average (the beige line). If DBC convincingly pops above its two-day high, it will represent a breakout above resistance of its downtrend line that began with the July 11 high. DBC still must contend with overhead resistance of both its 50 and 200-day moving averages, but a buy entry above its two-day high would provide a large enough profit buffer to quickly scratch the position if DBC fails its breakout attempt. Above all, the lack of correlation to the U.S. equities market is perhaps the most attractive element of this trade setup. For your information, the approximate composition of DBC is as follows: Crude Oil 37%, Heating Oil 23%, Corn 12%, Aluminum 10%, Wheat 10%, and Gold 8%.
Yesterday, the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average all closed at support of their 61.8% Fibonacci retracement levels (measured from their lows of September 18 to their highs of September 19). Regarding a pullback within an uptrend, we refer to the 61.8% Fibonacci retracement level as the “last line of defense” because a violation of that support level frequently leads to a complete reversal back to the prior low. Nevertheless, as long as the 61.8% Fibonacci retracement levels hold up, stocks could still rapidly reverse back up to last week’s highs within the next several days.
As per yesterday morning’s commentary, we bought the Ultra Russell 2000 ProShares (UWM) on the market open. It’s showing an unrealized loss at the moment, but is still above our stop loss. If the major indices hold yesterday’s lows, and hence the vicinity of their 61.8% Fibonacci retracements, the trade still has a good chance of working out. But regardless of whether or not it does, we still like the original reason for entry — the positive reward/risk ratio of buying the pullback to the 50% Fibonacci retracement, as well as support of the 50 and 200-day moving average convergence on the Russell 2000. Remember that profits can never be obtained without taking some degree of risk; we, as traders, get paid for taking calculated risks. With a portfolio that is still presently 80% cash, we’re certainly comfortable with the risk of having just this one trade on the table.
Today’s Watchlist:
There are no new setups in the pre-market today, though we may consider an intraday entry into DBC if it breaks out. As always, we will promptly send an Intraday Trade Alert if/when we enter anything new. Overall, until the indecision surrounding the Fed bailout package is resolved, it makes sense to remain largely in cash. Still, we’ll be prepared with the best new ETF setups when a trend eventually returns to the market. Patience pays big dividends in this business, as it enables us to preserve our hard-earned profits of the year.
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 the pre-market plan, we bought UWM five minutes after yesterday’s market open. Trade details listed above.
- 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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UWM long (200 shares from September 23 entry) –
bought 50.15, stop 47.62, target 57.20, unrealized points = (1.95), unrealized P/L = ($390)
Closed positions (since last report):
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(none)
Current equity exposure ($100,000 max. buying power):
- $9,640
Notes:
Edited by Deron Wagner,
MTG Founder and
Head Trader