Commentary:

A day after coming into support of their short-term 61.8% Fibonacci retracements, the major indices reversed in an attempt to move back towards last week’s highs. However, a bit of late day selling took the edge off the day’s gains. The S&P 500 rallied 2.0%, the Dow Jones Industrial Average 1.8%, and the Nasdaq Composite 1.4%. Small and mid-cap stocks lagged again, as the Russell 2000 and S&P Midcap 400 indices posted identical gains of 1.1%. Showing indecision into the close, the main stock market indexes finished near the middle of their intraday ranges.

Turnover picked up across the board, enabling both the S&P 500 and Nasdaq Composite to score a bullish “accumulation day.” Breaking the three-day streak of losses on declining volume, total volume in the NYSE rose 14%. Volume in the Nasdaq increased 4% above the previous day’s level. The S&P 500 has closed lower in three of the past four days, but each of the three “down” days was on lower volume. The sole “up” day was on higher volume. This is a bullish price to volume relationship that a healthy market would normally exhibit. Nevertheless, it was a bit discouraging that stocks were unable to close near their intraday highs. Advancing volume in the NYSE exceeded declining volume by just over 5 to 2. The Nasdaq adv/dec volume ratio was positive by 3 to 1.

Whenever the U.S. market enters into a downtrending period, the international ETFs usually offer investors an alternative place to divert funds with low correlation to the domestic markets. The current bear market has been different, as essentially every international ETF has fallen alongside of the U.S. After our domestic markets began forming short-term bottoms on September 18, we began looking for signs of bullish divergence amongst the international ETFs. Most roughly followed in lockstep alongside of the S&P 500, but iShares Australia Index (EWA) showed relative strength by breaking out above its intermediate-term downtrend line. Last week, EWA also demonstrated high volume typical of “capitulation.” This is shown on its longer-term weekly chart below:

Drilling down to the shorter-term daily chart, the relative strength of EWA becomes more clear. After the main stock market indexes rallied on September 18 and 19, they pulled back to retrace nearly two-thirds of those gains from September 22 to 24. But during that same time, EWA held in a tight, sideways consolidation near its September 19 high, and above its 20-day exponential moving average. The tight consolidation near the high is illustrated on the daily chart of EWA below:

Whenever an ETF exhibits relative strength by not pulling back alongside of the broad market, it is usually the first ETF to surge to a new short-term high when the major indices eventually bounce. As such, we like EWA for potential buy entry on a breakout above the high of this week’s consolidation. Notice how a rally above the four-day high will also correspond to a breakout above its 50-day MA. This should increase the amount of upside momentum EWA exhibits on a breakout. Regular subscribers to The Wagner Daily should note our detailed trigger, stop, and target prices below.

It’s encouraging that the major indices bounced yesterday, but we’re certainly not “out of the woods” yet. A lack of clarity regarding the Fed’s financial rescue package still exists, which undoubtedly was responsible for the late-day weakness stocks exhibited yesterday afternoon. We remain lightly positioned with just one long position (Ultra Nasdaq 100 ProShares – QLD). As stocks begin to show more bullish confirmation, we’ll gladly get more aggressive on the long side, but there frankly is no reason to do so just yet. If entering any new positions right now, consider ETFs with a low correlation to the main stock market indexes. In addition to EWA, remember that various commodity ETFs are still forming “bull flag” patterns on their daily charts. A rally above their recent highs would constitute valid long entry points. Tickers to watch include: DBC, GLD, USO, and FXE (a play on the weakening U.S. dollar).

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Today’s Watchlist:

iShares Australia Index (EWA)
Long

Shares = 300
Trigger = 23.42 (above this week’s high and 50-day MA)
Stop = 21.72 (below the 20-day EMA)
Target = 26.52 (resistance of July 2008 high)
Dividend Date = n/a

Notes = See commentary above for explanation of this setup.

In addition to EWA, we continue to monitor the various commodity ETFs for potential breakouts. If we enter any of them, we will promptly send an Intraday Trade Alert.

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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 = + 0.75, unrealized P/L = + $225

Closed positions (since last report):

(none)

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

$17,757

Notes:

• No changes to our open position.
• 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