Commentary:

After days and days of 3% to 5% swings in the major indices, price action moderated to its tightest levels in weeks. Stocks traded in a narrow, sideways range throughout the day and finished with mixed results, as investors awaited details of the government’s financial bailout package. The Nasdaq Composite ticked 0.1% higher, the S&P 500 dipped 0.2%, and the Dow Jones Industrial Average fell 0.3%. Showing the most relative strength was the large-cap Nasdaq 100 Index, which rallied 0.8%. Although small caps showed incredible relative strength during the September 18 – 19 rally, they curiously showed significant relative weakness yesterday, causing the Russell 2000 to slide 1.6%. The S&P Midcap 400 fared only slightly better, as the index declined 1.1%. The main stock market indexes closed near the bottom third of their intraday ranges, but off the day’s lows.

Total volume in the NYSE was 9% lower than the previous day’s level, while volume in the Nasdaq similarly declined 11%. The third straight day of lighter volume in the NYSE confirms investors and traders have primarily been waiting on the sidelines until the details of the Fed bailout package are agreed upon by Congress. When resolution is reached, expect a large surge in turnover, as well as the return of high volatility. Like the closing prices, market internals were mixed. In the NYSE, declining volume marginally exceeded advancing volume, but the Nasdaq adv/dec volume ratio was positive by nearly 2 to 1.

In yesterday’s commentary, we pointed out the PowerShares DB Commodity Index (DBC) as a potential buy setup in the coming days. Since it remained in a tight range near its recent high, the “bull flag” pattern remains intact, as does the setup. The ideal buy point is now a rally above its three-day high of $36.17. More specific commodity ETFs such as Gold (GLD, DGP) and Crude Oil (USO) have similar chart patterns to the diversified DBC. CurrencyShares Euro Trust (FXE), which follows the price of the euro vs. U.S. dollar, has also been forming a “bull flag” over the past three days, indicating the likelihood of further weakness in the U.S. dollar. Commodities often move higher as the dollar gets weaker, and this appears to be happening again.

We view yesterday’s lows and highs in the main stock market indexes as pivotal technical levels that will determine the short-term direction of the market. The intraday lows of the major indices approximately correlate to pivotal support of their 61.8% Fibonacci retracements (from their September 18 low to September 19 highs). If those lows are convincingly violated, stocks will likely retrace all the way back down to test their September lows. However, a rally above yesterday’s highs could spark a high-momentum rally, as investors would anticipate a move back up to the September 19 highs. The reaction to final details of the Fed rescue package will have a large bearing on which of those two scenarios occurs. On this note, remember it’s the reaction to key news releases that matters, not the actual details of the news.

Surprisingly notable relative weakness in small-caps, which led the broad market higher late last week, caused our new long entry into Ultra Russell 2000 ProShares (UWM) to quickly stop out yesterday. However, as the reward/risk ratio of being long at current levels of this pullback is so high, we wanted to maintain at least one bullish position. But because the Russell 2000 was so weak, while the Nasdaq 100 showed significant bullish divergence, we bought into Ultra Nasdaq 100 ProShares (QLD), rather than re-entering UWM. So far, that analysis is working out well, as UWM lost 1.3% yesterday, but QLD gained 2.1%. Trade setups with a very high reward/risk ratio typically have a higher chance of stopping out on the initial entry, and may require a re-entry attempt or two in order to catch the potential profit. Conversely, trade setups in which the potential reward is only minimally greater than the risk of stopping out usually have a higher chance of success, but less potential profit.

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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.

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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. Please review the Wagner Daily Subscriber Guide for important, automatic rules on trigger and stop prices.

Open positions (coming into today):
QLD long (300 shares from September 24 entry) –

bought 58.44, stop 56.49, target 67.30, unrealized points = + 0.15, unrealized P/L = + $45

Closed positions (since last report):

UWM long (200 shares from September 23 entry) –

bought 50.15, sold 47.62, points = (2.53), net P/L = ($510)

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

$17,577

Notes:

• After UWM stopped out, we sent an Intraday Trade Alert with a buy stop on QLD, which subsequently triggered. New 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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Edited by Deron Wagner,
MTG Founder and
Head Trader