Commentary:
After beginning the day slightly higher, stocks quickly sold off to build on the previous day’s losses, but a strong reversal that began at mid-day enabled the major indices to close with impressive gains. Intraday volatility has been extremely high over the past week, and yesterday was no exception. Spanning a 9% trading range, the benchmark S&P 500 Index was down 4.7% at its morning low, but reversed to close 4.3% higher. The Nasdaq Composite followed a similar intraday pattern by turning its 3.8% morning loss into a 5.5% closing gain. The Dow Jones Industrial Average similarly advanced 4.7%. The small-cap Russell 2000 showed relative strength by climbing 6.9%, as the S&P Midcap 400 lagged slightly with its 3.9% gain. Opposite of the Wednesday’s closing action, each of the main stock market indexes finished at its best level of the day.
The most positive thing about yesterday’s bullish reversal was that sharply higher turnover accompanied the advance. Total volume in the NYSE rose 28% above the previous day’s level, while volume in the Nasdaq similarly ticked 36% higher. On October 13, the major indices zoomed more than 11% higher, but the huge rally actually lacked the confirmation of increasing volume. Yesterday, however, firmly higher volume enabled both the S&P 500 and Nasdaq Composite to register a rare “accumulation day” that was indicative of buying amongst mutual funds, hedge funds, and other institutions. Though yesterday’s broad-based percentage gains were less than Monday’s gains, volume in both exchanges was about 25% higher. Market internals were bullish. In the NYSE, advancing volume exceeded declining volume by a ratio of just over 7 to 2. The Nasdaq adv/dec volume ratio was positive by more than 6 to 1.
In yesterday’s Wagner Daily, we said, “With essentially all of the October 13 gains erased, the main stock market indexes are now faced with testing support of their recent lows. If the market still has a chance to form a bottom, these prior lows (from October 10) must hold. . .When markets bottom, it’s more of a process than a one-time event. As such, it’s not unusual for stocks to fall all the way back to test their prior lows, shaking out the last of the bulls, before finally getting some legs.” As such, our main focus going into yesterday’s session was monitoring the performance of the major indices as they approached their intraday lows of October 10. Though the morning losses were steep, each of the major indices indeed held support of its prior low. The first “higher low” of the fledgling rally attempt is circled on the daily chart of the S&P 500 below:
In several ways, yesterday’s rally was technically more beneficial for the stock market than the humongous rally of October 13. Of underestimated importance by some, yesterday’s gains occurred on significantly higher volume than the previous day’s losses, which was not the case on October 13. A sustainable rally simply cannot develop without the support of institutional buying. Yesterday’s “accumulation day” confirmed the presence of such. This time around, there was also a precedence of recent support levels that enabled the main stock market indexes to form “higher lows” yesterday. Conversely, when stocks surged higher on October 13, they reversed from a virtually vertical drop that lacked any area of prior price support in recent years. That helps explain why stocks so easily gave back most of their gains just two days later. But now that “higher lows” have formed on the daily charts of the major indices, stocks may start forming bases of price support that will enable them to follow-up with the formation of “higher highs.” After the “higher lows” and “higher highs” are established on the daily charts, stocks will have entered a confirmed, overall short to intermediate-term trend reversal. This was last seen from mid-July to mid-August of 2008.
The odds of the broad market moving sideways to higher next week are now pretty good. However, gigantic price swings over the past week means the daily charts of nearly every individual stock and ETF are simply a mess. Ideally, volatility needs to calm down, and equities need to at least form bullish consolidation patterns on their short-term hourly charts. If they do, ETFs with the most relative strength will automatically rise to the top, presenting opportunities for price outperformance, for as long as this new rally attempt lasts.
Yesterday, we said we were in “SOH mode” (sitting on hands) until we saw how things played out when the major indices approached their prior lows. Now that we’ve had a strong bullish reversal on higher volume, as well as a “higher low,” we’re not opposed to cautiously and slowly jumping back into the market. Nevertheless, there’s no hurry to do so until we see some nice patterns develop on the hourly charts. Further, today is monthly options expiration, which is usually not a good day to enter new trades. Next Monday, we’ll start the week by looking at charts that show just how far a rally may carry us before stocks run out of gas and start feeling the pressure to head back down. In the meantime, a lower volatility session to help establish price support in the stock market would be most welcome today.
Today’s Watchlist:
There are no new setups in the pre-market today. Since we’re fully in cash right now, we have the benefit of being able to quickly and easily enter any new trade opportunities that develop in the coming days. As always, we will promptly send an Intraday Trade Alert if/when 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):
- We are currently flat, stalking the market for the next ideal trade opportunity.
- 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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(none)
Closed positions (since last report):
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(none)
Current equity exposure ($100,000 max. buying power):
- $0
Notes:
Edited by Deron Wagner,
MTG Founder and
Head Trader