Commentary:
Following through on last Friday’s weakness, stocks gapped lower on the open, then built on their losses as the day progressed. At their afternoon lows, the major indices met or exceeded the humongous losses of September 29, but this time a bullish reversal in the final hour of trading enabled the broad market to substantially trim its decline. Roughly halving their maximum intraday losses of approximately 8%, the Dow Jones Industrial Average fell 3.6%, the S&P 500 3.9%, and the Nasdaq Composite 4.3%. The small-cap Russell 2000 and S&P Midcap 400 indices shed 3.8% and 4.4% respectively. The main stock market indexes finished in the upper half of their intraday ranges.
Turnover soared higher across the board, as broad panic selling began setting in. Total volume in the NYSE surged 30% above the previous day’s level, while volume in the Nasdaq similarly swelled 38%. The large losses on sharply higher volume pointed to another round of institutional selling. However, a closer look at the intraday volume pattern of the overall market reveals a subtle, yet very important, detail. When stocks were trading at their worst levels of the day, right before the late-day reversal, volume in the NYSE was tracking only 23% higher, and volume in the Nasdaq was on pace to be 31% greater. Since turnover was even higher by the closing bell, this tells us the buying interest in the final hour of trading was proportionately greater than the pace of selling earlier in the day. When this not-so-obvious scenario occurs, bullish momentum often carries into the next day.
CurrencyShares Japanese Yen (FXY), which we analyzed as a potential buy setup in yesterday’s commentary, gapped higher on the open, then subsequently rallied to a 3.6% gain, a rather large advance for a currency ETF. The FXY breakout above its short-term consolidation is shown on the daily chart below:
When an ETF we’re stalking for a potential buy gaps opens well above our trigger price and holds, as FXY did yesterday, it is more bullish than an ETF that trades through our trigger price on an intraday basis. Confirmed by a volume spike to more than double its average daily volume yesterday, the FXY gap is likely to hold. But realize that when an ETF opens well above our intended entry price, the reward/risk ratio is reduced if the same stop is kept. As such, per Intraday Trade Alert to subscribers, we bought FXY a few minutes after yesterday’s open, but simultaneously raised the protective stop price. Our initial stop was below support of the 20 and 200-day moving averages. Now, our stop is just below the closing price of October 3. If FXY retraces the entire gap, below the short-term breakout level, we no longer want to be long.
With its massive volatility, high volume, and bullish end-of-day reversal, yesterday’s session resembled a “capitulation day,” the point at which pure fear takes over and causes investors to make emotional decisions (aided by help from hyped up news media). With each successive day down, there are fewer bulls remaining on Wall Street. Contrary to what the average investor might think, the last of the bulls finally “throwing in the towel” is exactly what is needed in order for the market to form a significant bottom. But although such days are an important part of helping a weak market attract new funds and form a bottoming process, we’re still hesitant to confidently label yesterday’s action as a “capitulation day.” One or two other such technical formations over the past month only led to the subsequent setting of new lows in this news-driven environment. Nevertheless, yesterday’s late-day action was definitely positive.
All the main stock market indexes formed bullish “hammer” candlestick patterns on their daily charts yesterday. This pattern occurs when a stock, ETF, or index moves significantly lower after the open, but rallies to close well above the intraday low. The resulting candlestick has a long wick, with a small body at the top, and resembles a hammer. Below, we have circled the “hammer” candlestick on the daily chart of iShares Russell 2000 (IWM), a popular ETF proxy for the small-cap Russell 2000 Index:
When a “hammer” forms after a lengthy sell-off, it often leads to gains in the following days. However, the daily chart patterns of the major indices are so bearish that it’s difficult to predict just how much, if at all, stocks will follow through to the upside. With so much overhead supply to contend with, it would be surprising if the broad market moved much higher without first consolidating in a tight range for a few days. Such action would be bullish, and could possibly even create some new bullish setups on the ETF charts. Still, with the exception of ultra short-term setups for daytraders, there simply are not yet any impressive swing trade setups on the long side. Depending on market action over the next several days, we’ll be watching for any new developments. As for the short side, we don’t like the reward/risk of new short entries at current levels, especially considering yesterday’s late-day reversal.
Today’s Watchlist:
There are no new setups in the pre-market. As always, we’ll promptly send an Intraday Trade Alert if 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):
- FXY triggered for buy entry yesterday, and is presently showing an unrealized gain. Note the new, tighter stop due to higher entry price.
- BBH got absolutely crushed yesterday. Fortunately, we followed the MTG Opening Gap Rules. Though we still took a hit, we exited shortly after the open, many points above yesterday’s closing price.
- 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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FXY long (200 shares from October 3 entry) –
bought 96.93, stop 94.30, target 103.20, unrealized points = + 1.41, unrealized P/L = + $282
Closed positions (since last report):
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BBH long (100 shares from October 3 entry) –
bought 184.06, sold 175.78, points = (8.28), net P/L = ($830)
Current equity exposure ($100,000 max. buying power):
- $19,668
Notes:
Edited by Deron Wagner,
MTG Founder and
Head Trader