Commentary:
Lingering indecision of the Fed bailout package caused stocks to get off to a rough start last Friday morning, but the broad market showed resilience for a change, reversing to grind its way higher throughout the day. By the closing bell, the major indices finished with mixed results. Recovering from an opening loss of 2.2%, the Nasdaq Composite finished just 0.2% lower. The S&P 500 followed a similar intraday pattern, but managed to close 0.3% higher. Blue-chips fared even better, enabling the Dow Jones Industrial Average to gain 1.1%. The small-cap Russell 2000 and S&P Midcap 400 indices slipped 0.1% and 0.7% respectively. Despite the assorted closing prices, all the main stock market indexes finished near their intraday highs.
Total volume in the NYSE declined 4% below the previous day’s level, as volume in the Nasdaq ticked 5% higher. The higher volume loss in the Nasdaq Composite technically caused the index to register a “distribution day,” but the intraday price pattern was actually bullish and not indicative of institutional selling. Further, turnover in both exchanges remained below 50-day average levels for the fifth consecutive day, pointing to a lack of commitment amongst traders on both sides of the market.
As we enter the new week, the best trade setups are still found within the various commodity ETFs, many of which are now forming clear “bull flag” patterns on their daily charts. Last week, we pointed out DB Commodity Index Fund (DBC) as a potential buy setup, but it has not yet rallied above its recent high of $36.17. Continuing to consolidate in a tight range, near the vicinity of its 20-day EMA, DBC remains a bullish setup going into today. Sporting a similar chart pattern is the U.S. Oil Fund (USO), which roughly follows the price of crude oil futures. Its daily chart is shown below:
In addition to forming a “bull flag” pattern, USO is also poised to break out above resistance of its intermediate-term downtrend line, which began with the high of July 11, 2008. Drilling down to the shorter-term hourly chart interval, notice how the 200-period moving average (MA) perfectly acted as resistance last week:
This illustrates how the 200-period MA often acts as a pivotal support/resistance level on all chart intervals, not just the more common daily chart. As for a buy entry into USO, one could take a partial position over last Friday’s high of $86.67, then add to the position on a confirmed rally above last week’s high of $89.16. Alternatively, one might consider taking a partial position on today’s open, as USO is presently gapping down and poised to open around the $83 level. Buying a pullback to near support of the 10-day moving average (the dashed line on the chart above) provides a more positive reward/risk entry, but also carries an inherently greater chance of the trade stopping out.
Along with DBC and USO, GLD (SPDR Gold Trust) and SLV (iShares Silver Trust) are also forming similar patterns. As they’re roughly trading in sync with one another, any of those ETFs could be in play in the coming days. If we enter any of them on a breakout, or pullback to short-term support, we’ll promptly send an Intraday Trade Alert to regular subscribers. Although not a commodity ETF, CurrencyShares Euro Trust (FXE) is also forming a “bull flag” chart pattern at resistance of its intermediate-term downtrend line. The chart below shows how commodities often move in the inverse direction of the U.S. dollar:
As you may have already heard, Congress reached a tentative agreement on details of the U.S. financial rescue plan over the weekend. Though it goes to vote today, the current pre-market gap down in the futures markets tells us that investors and traders are not impressed. It will be interesting to see how the market reacts in the coming days, and is probably best viewed from the sidelines for now. If entering anything new right now, the nice thing about the commodity ETFs is their low correlation to the direction of the main stock market indexes. Presently, we remain positioned mostly in cash, holding just one long position we bought on last week’s pullback off the September 19 high.
Today’s Watchlist:
There are no new setups in the pre-market today, although we are stalking the various commodity (and currency) ETFs for potential entry points. We are considering buying USO into weakness of its opening gap down to its 10-day MA, and will promptly send an Intraday Trade Alert with details if/when we do.
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 used the MTG Opening Gap Rules to manage QLD last Friday morning. This enabled us to stick with QLD as it reversed higher immediately after the open. New stop listed above is 15 cents below last Friday’s low.
- 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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QLD long (300 shares from September 24 entry) –
bought 58.44, stop 56.26, target 67.30, unrealized points = + 0.36, unrealized P/L = + $108
Closed positions (since last report):
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(none)
Current equity exposure ($100,000 max. buying power):
- $17,640
Notes:
Edited by Deron Wagner,
MTG Founder and
Head Trader