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The Wagner Daily


Commentary:

After opening flat, stocks traded in a relatively tight range throughout the first half of yesterday, exhibited the usual post-Fed volatility and indecision, then finished with mixed results. As widely anticipated, the Federal Open Market Committee (FOMC) cut interest rates by 50 basis points, sparing traders of any surprises that could have generated an extreme reaction in the stock market. A little more than an hour after the 2:15 pm ET Fed announcement, the S&P 500 was trading 3% higher, but a wild sell-off in the final ten minutes of trading caused the benchmark index to close 1.1% lower. The Dow Jones Industrial Average similarly lost 0.8%. The Nasdaq Composite also declined into the close, but still finished 0.5% higher. The small-cap Russell 2000 and S&P Midcap 400 indices played “catch up” with their large-cap cousins, climbing 1.7% and 1.8% respectively. The S&P 500 and Dow Industrials settled in the bottom quarter of their intraday ranges, as the rest of the main stock market indexes held just below the middle of their ranges.

In both exchanges, turnover was less than 1% above the previous day’s level, essentially making volume unchanged. Trading remained above average levels for a second straight day, and market internals were also pretty good considering the closing numbers. In the NYSE, advancing volume was on par with declining volume. The Nasdaq adv/dec volume ratio was positive by just under 2 to 1.

If you were watching yesterday’s closing action, you may have been caught off guard by the swiftness of the last minute sell-off. Briefing.com had this to say about it, “The Dow dropped almost 450 pts in the last 13 minutes of trading following a Dow Jones headline indicating that GE wants to keep 2009 profit the same as 2008. Based on current consensus estimates, GE is seen earning $1.96/share in 2008 and $1.78 in 2009. Hence, flat earnings would actually represent upside to current consensus. However, the price action in the stock (GE fell 5.3% following the headline) suggests that traders/investors assumed that the comment was an earnings warning — leading them to sell GE. . .Given the volatility that always occurs on FOMC policy days, traders were sitting with their fingers on the sell key. The GE breakdown and intraday technical failure gave them a reason to unload.”

Based on the recovery in both GE and the S&P/Nasdaq futures markets right after the close, the explanation above makes sense. Nevertheless, despite the closing decline, stocks actually held up quite well yesterday. Even though the S&P and Dow each finished approximately 1% lower, their pullbacks were small considering both indexes advanced more than 10% on Tuesday. The Nasdaq Composite even managed to build on Tuesday’s gain, while the small and mid-cap indices showed surprising strength. Overall, the stock market followed through on Tuesday’s bullish session much better than we’ve seen on other “up” days this month.

Not only did the market not blow up after the Fed announcement, but quite a few individual stocks turned in impressive performances that led the major indices. Apple (AAPL), for example, showed relative strength with its 4.8% gain. With a vast majority of stocks and ETFs trading well below their 50-day moving averages, it’s still way too early to say new leadership in the market is developing; nevertheless, yesterday’s stealth strength, especially in the small and mid-cap arena, was a good start to the market’s latest reversal attempt. So, let’s look at a few charts of ETFs on our radar screen in the near-term.

A perceived flight to safety during the stock market’s recent bloodbath was responsible for a strong rally in CurrencyShares Japanese Yen (FXY) over the past month. Inversely correlated ETFs aside, FXY has definitely been the strongest ETF in recent weeks. Pulling back to support of its 10-day moving average after last week’s breakout to a new all-time high, FXY is now setting up for potential long entry. The 10-day MA is marked as the dashed line on the daily chart of FXY below:

A pullback to the 10-day MA often presents an ideal entry point to anticipate a resumption of the dominant trend in strongly trending stocks and ETFs. However, we’d ideally like to see FXY consolidate in a tight range for at least another day or two, allowing the 20-day MA to rise up to provide support as well. If that occurs, we’ll consider a re-entry into FXY (we already had a profitable trade earlier this month), after it moves above its resistance of its hourly downtrend line.

Traders looking for a quick, 1 – 3 day momentum trade might consider buying iShares Corporate Bond (LQD), which responded favorably to yesterday’s interest rate cut. Already trading above both its 10 and 20-day moving averages, LQD is now poised to break out above the high of its short-term consolidation within the next day or two. Also, notice how yesterday’s volume was substantially higher than average, hinting at institutional accumulation:

If LQD breaks out above its range, the obvious short-term target is resistance of its 50-day MA, just below the $93 level. A protective stop could be placed 1 – 1.5 points below the breakout level. If LQD rallies to its 50-day MA and continues to act well thereafter, an added bonus is the regular dividend distributions of LQD (and other fixed-income ETFs as well).

Showing relative strength to the broad market for the past two weeks, Pharmaceutical HOLDR (PPH) may soon reverse both it short and intermediate-term downtrends. A convincing rally above yesterday’s high will cause PPH to reclaim support of its 20-day exponential moving average (the beige line on the chart below). Since the 20-day EMA has perfectly acted as resistance for the past two months, a close above that pivotal resistance level will indicate a change of sentiment in the pharmaceutical sector. SPDR Select Sector Health Care (XLV) is another ETF in the sector with a similar chart pattern. Below is the daily chart of PPH:

Sporting a similar chart pattern to the pharmaceutical sector is utilities. Vanguard Utilities ETF (VPU) is in play on a breakout above yesterday’s high. This would put VPU above its 20-day EMA for the first time in two months. For a little more price confirmation, consider waiting for a rally above the October 20 high of $61.87 before buying a full position. As with so many stocks and ETFs showing relative strength and attempting to reverse their downtrends, resistance of the 50-day MA (around $68) is a logical target in VPU. In the same sector, iShares Utilities (IDU) is also a possibility. Below is a daily chart of VPU:

For those of you who like to trade the major indices, the Dow is showing the most relative strength of the group. Yesterday, both the DIAMONDS (DIA) and Ultra Dow 30 ProShares (DDM) were the only broad-based ETFs that probed above resistance of their 20-day EMAs, as well as resistance of their prior highs. A close above yesterday’s high in the Dow would correspond to a breakout above both its 20-day EMA and “swing high” of October 21. This is shown on the chart of DDM below:


Today’s Watchlist:

    We’re watching all the ETF setups above, but are not sure which one will generate a proper entry point first. As such, we’re not listing anything in the pre-market, but will send an Intraday Trade Alert if/when we buy 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.

    Open positions (coming into today):

      DGP long (350 shares from October 24 entry) –

      bought 13.39, stop 11.48, target 17.28, unrealized points = + 0.67, unrealized P/L = + $235

    Closed positions (since last report):

      (none)

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

      $4,921

    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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    Please check out the Wagner Daily Subscriber Guide to learn how to get the most from your subscription.

Edited by Deron Wagner,
MTG Founder and
Head Trader

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