A coordinated round of global interest-rate cuts in the pre-market led to a wild, indecisive session of trading yesterday morning, but stocks stabilized as volatility eased later in the afternoon. Thirty minutes before the closing bell, all the major indices were showing respectable gains, but a last minute pullback caused the broad market to finish in negative territory for the sixth consecutive day. The Nasdaq Composite, up 3.0% just one hour before the closing bell, finished 0.8% lower. The S&P 500 lost 1.1% and the Dow Jones Industrial Average fell 2.0%. The small-cap Russell 2000 and S&P Midcap 400 indices declined 2.2% and 1.2% respectively. Showing relative strength and bullish divergence was the tech-heavy Nasdaq 100 Index, which eked out a gain of 0.1%, but surrendered an earlier gain of more than 4%. Despite the weakness into the close, the main stock market indexes finished above their intraday lows that were set at the open, and subsequently tested at mid-day.
Turnover surged across the board, as volume spiked to its highest levels in nearly a month. Total volume in the NYSE increased 28% above the previous day’s level, while volume in the Nasdaq ticked 26% higher. On the surface, it might seem as though yesterday’s fast pace was exclusively the result of institutional selling; however, much of the volume increase occurred as stocks rallied off their opening lows, and again later in the afternoon. Market internals were negative, but only marginally. In both the NYSE and Nasdaq, declining volume exceeded advancing volume by a ratio of less than 2 to 1.
Though the major indices closed lower yesterday, we detected a subtle change of character in the market’s behavior yesterday. With the exception of the sell-off in the final fifteen minutes of trading (discussed in the following paragraph), we liked the way the main stock market indexes consolidated in a tight, sideways range, at their intraday highs, throughout most of the afternoon. When this pattern occurs after the previous day’s lows are “undercut,” the “bull flag” formation usually leads to further gains in the very short-term. Further, it was the first time since this month’s sell-off began that the trading ranges tightened up enough to allow the major indices to form such an intraday consolidation.
After forming one of the nicest intraday consolidations we’ve seen in quite a while, the major indices suddenly moved sharply lower in the final fifteen minutes of trading yesterday. Unlike recent sell-offs in the broad market, which have usually started earlier in the afternoon, this one seemed different. Though we can’t be certain of the exact reason, two thoughts come to mind. First, we probably saw the result of forced liquidations among institutions that need to raise cash for investor redemptions (along with a bit of margin selling on the retail level). Second, the SEC restrictions against short selling more than 800 securities was due to expire at midnight last night. This probably created a bit of nervousness, as traders were not sure of the impact it would have on today’s session. Personally, I don’t think there will be any negative effect because the financials have already been beaten blind (as if the short selling restrictions had any effect on preventing the market from falling apart regardless). If anything, the lifting of the short selling restrictions is actually a positive for the market because it allows for more powerful “short squeezes” that help form important market bottoms.
Several sectors showed bullish action and strong gains indicative of short-term bottoming patterns yesterday. These industries included: basic materials (metals and mining), agriculture/fertilizers, and gold mining. Although SPDR Gold Trust (GLD), a popular ETF proxy for the spot gold commodity, gained only 2.5% yesterday, individual shares of gold mining companies scored much larger gains. Comprised of a basket of individual gold mining stocks, Market Vectors Gold Miners (GDX) rocketed 14.2% higher yesterday! For once, the top-gaining ETF in the stock market was not one of the ProShares UltraShort ETFs. Confirming the strong percentage gain of GDX, more than 10 million shares also changed hands, nearly double its average daily volume. The daily chart of GDX is shown below:
On the chart above, notice the “undercut” of support that occurred three days ago. Such price action is representative of shaking out the remaining “weak hands,” which subsequently enables the ETF to move higher. GDX has begun to form a “double bottom” pattern, but it still must contend with overhead resistance of its 20-day exponential moving average (EMA), as well as its 50-day moving average (MA). Over the next several days, we’d like to see GDX consolidate in a tight, sideways range. If it does, we will consider buying a subsequent breakout above the range. For now, however, it’s too early to jump into GDX based on just one day’s price action, especially considering the broad market’s whippy behavior. Still, consider adding GDX to your watchlist of potential entries.
Even though trading at a 52-week low, Basic Materials is another sector that showed relative strength to the broad market yesterday. Showing an impressive gain of 8.5% at its intraday peak, S&P Select Materials SPDR (XLB) still managed to close 3.2% higher. Turnover in XLB also spiked to 250% its average daily volume, pointing to institutional accumulation. On a technical level, XLB “undercut” its recent low in the morning, then rallied above resistance of its 20-period EMA on the hourly chart for the first time since September 22. The last minute weakness in the overall market caused XLB to pull back below that moving average, but we think XLB will quickly move back above its 20-EMA/60 min. in today’s session. On the hourly chart of XLB below, notice how perfectly the 20-EMA has acted as resistance in recent weeks. The same is true of this moving average on the charts of the major indices. The power of this moving average is discussed in my new book, Trading ETFs: Gaining An Edge With Technical Analysis:
If XLB closes above its 20-EMA on the hourly chart, it will indicate a short-term change of trend. This does NOT mean XLB will ultimately not move lower, but it does mean XLB may provide a tradeable bounce of 2 to 5 days. If the broad market follows through on yesterday’s reversal attempt, we will buy XLB as a short-term trade, when it moves back above its 20-EMA on the hourly chart. On the upside, our price target is resistance of the 20-EMA on the daily chart, presently at the $33.19 level. If the trade works out and XLB starts to approach that level, we will sell into strength of the move, rather than holding through a subsequent pullback.
In the pre-market, both the S&P 500 and Nasdaq 100 futures markets are indicating a significantly higher open for the stock market. An opening price near yesterday’s highs is exactly what we wanted to see, as it means the closing weakness we saw yesterday afternoon was a non-event. If the overall market follows through on its afternoon consolidation pattern, it will enable the major indices to break out above their 20-EMAs on their hourly downtrend lines, pointing to a short-term change of bias. Still, the main stock market indexes need to close above their 20-EMAs on the hourly charts, not just probe above them on an intraday basis. If dipping a toe in the market on the long side, consider closing out positions before the end of day if it looks as though the S&P 500 and/or Nasdaq Composite are not going to finish above their 20-EMAs on the hourly time frame.
S&P Select Materials SPDR (XLB)
Shares = 250
Trigger = 28.52 (above the 20-EMA/60 min.)
Stop = 26.34 (below yesterday morning’s consolidation)
Target = 33.18 (resistance of the 20-day EMA)
Dividend Date = mid-December, 2008
Notes = See commentary above for explanation of this setup. Note this is only intended to be a short-term bounce play, with expected time horizon of 2 to 5 days.
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):
- Per Intraday Trade Alert, we conservatively scaled into a position of QLD yesterday, and will consider adding further to the position if market conditions are favorable.
- FXY continues to act well, and we will be raising the stop after a “swing low” is set on the first pullback.
- 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.
FXY long (200 shares from October 3 entry) –
bought 96.93, stop 94.30, target 103.20, unrealized points = + 2.95, unrealized P/L = + $590
QLD long (150 shares from October 8 entry) –
bought 37.72 (avg.), stop 34.32, no target (will trail stop), unrealized points = (2.15), unrealized P/L = ($322)
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
Edited by Deron Wagner,
MTG Founder and