Commentary:

Building on the momentum from Wednesday’s sell-off, stocks continued to correct from their recent gains yesterday. The Nasdaq Composite fell 4.3%, the Dow Jones Industrial Average 4.9%, and the S&P 500 5.0%. The small-cap Russell 2000 and S&P Midcap 400 indices shed 3.7% and 4.6% respectively. All the main stock market indexes finished near their intraday lows. Prior to November 5, stocks were trading in a tight range, and looked as though volatility was settling down. But with a 10% drop in the Dow over the past two days, the market’s back to keeping traders and investors on their toes!

Although the major indices declined slightly less than they did the previous day, it’s bearish that turnover rose this time around. Total volume in the NYSE swelled 19%, while volume in the Nasdaq increased 15%. The higher volume losses caused both the S&P 500 and Nasdaq Composite to register a bearish “distribution day,” the second such day of institutional selling since the broad market formed its recent bottoming attempt on October 28. There have also been two days of higher volume gains (aka “accumulation days”) during the same period. In both exchanges, market internals were about as negative as the previous day.

On November 5, when stocks began correcting from their strong rally off the lows, we focused on determining which industry sectors were showing the most relative strength to the broad market. We did so by finding the sector ETFs that were retracing less than the main stock market indexes. Generally, these ETFs these will be the first ones to rip higher when the broad market subsequently bounces again. Our recent scanning for relative strength turned up the biotech sector. To illustrate the relative strength in that sector, even through yesterday’s losses, take a look at a six-day comparison of the S&P 500 Index ($SPX), overlaid with the Biotech Index ($BTK):

For those not familiar with it, the chart above is a “percentage change chart” in which we overlay two indexes or ETFs with one another. Rather than plotting the price of a stock or ETF, this type of chart merely shows the percentage change over a given period of time (six days in this case). When two symbols are overlaid with one another, this type of chart becomes a great way to quickly and easily spot sectors and ETFs with relative strength (as discussed thoroughly in my new book, Trading ETFs: Gaining An Edge With Technical Analysis).

Since the $BTK has been showing bullish divergence to the $SPX over the past few days, biotechs should be one of the first sectors to rally when the broad market finds support on this pullback. Anticipating a more shallow correction than what has resulted, we bought iShares Nasdaq Biotech (IBB) on Wednesday. The position is currently against us a bit, but is still holding up much better than the broad market. It has also retraced less than 50% of its rally off the lows, so it’s not yet in serious danger of completely reversing its newly established uptrend. Meanwhile, our long positions in iShares Corporate Bonds (LQD) and CurrencyShares Japanese Yen (FXY) are both showing solid unrealized profits, which helps to counteract the risk of any bullish positions such as IBB.

We concluded yesterday’s newsletter by saying, “The main stock market indexes are still holding support of their 10-day moving averages, and have also retained a majority of their recent gains. With a few days of higher volume gains, and the lack of higher volume losses, the price to volume relationship in the overall market has also been improving. Overall, the market seems to have built in enough support to prevent the October lows from being tested anytime soon, though that doesn’t mean it won’t ultimately happen.” Obviously, yesterday’s subsequent sell-off changed the situation a bit.

The major indices are now back below their 10-day MAs, and they’ve also retraced more than half of their gains off last week’s lows. Yesterday’s higher volume also means the bears were starting to awaken again. Nevertheless, as shown on the daily chart below, the S&P 500 closed right at support of its 61.8% Fibonacci retracement:

Generally, the 61.8% Fibonacci retracement level is considered to be the “last line of defense” when a stock or index is experiencing a pullback. If the retracement goes beyond the 61.8% retracement level, it significantly increases the odds of a complete reversal back to the prior low (or back to the high if measuring the retracement of a downtrend). Simply put, it’s crucial that the S&P 500 recaptures some of its losses of the past two days by the closing bell. If it does, a resumption of the fledgling rally off last week’s lows could develop next week. But if the S&P fails to regain any ground today, a test of last month’s lows will likely confront traders instead.

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Today’s Watchlist:

There are no new setups in the pre-market today. We now have a diverse, low-correlated mix of five open positions. We’ll focus on managing those for maximum profitability, rather than adding new positions today.

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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):
LQD long (200 shares from November 4 entry) –

bought 88.95, stop 85.72, target 96.30, unrealized points = + 1.92, unrealized P/L = + $384

FXY long (250 shares from November 5 entry) –

bought 100.85, stop 97.89, target new high (will trail stop), unrealized points = + 1.30, unrealized P/L = + $325

DGP long (350 shares from October 24 entry) –

bought 13.39, stop 11.48, target 17.28, unrealized points = (0.35), unrealized P/L = ($123)

IBB long (200 shares from November 5 entry) –

bought 71.29, stop 67.88, target 77.80, unrealized points = (2.77), unrealized P/L = ($554)

Closed positions (since last report):

UWM long (350 shares from November 6 DAYTRADE entry) –

bought 22.44, sold 22.18, points = (0.26) net P/L = ($98)

DDM long (200 shares from November 5 entry) –

bought 37.80, sold 34.97, points = (2.83) net P/L = ($560)

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

$61,980

Notes:

• Per Intraday Trade Alert, we lowered the stop of DDM by 25 cents in the morning, but it was subsequently hit shortly thereafter.
• Per Intraday Trade Alert, we took a daytrade in UWM, after it rallied above its 20-EMA/5 min., but it failed to develop any momentum to the upside. We scratched the intraday trade (gain or loss of less than $100).
• Generally speaking, daytrading is not part of our usual strategy. However, we have a lot of experience doing so, and our strategies work the same on any timeframe. With the market being so volatile lately, daytrades provide a way to increase potential profits, but without the added risk of holding positions overnight. If you receive an alert for a daytrade, but you do not trade intraday, please disregard the alert. We only plan for such trades to be a temporary way to help combat volatility and smooth our equity curve.
• 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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Edited by Deron Wagner,
MTG Founder and
Head Trader