Commentary:

Bearish momentum from Wednesday’s breakdown to new multi-year lows led to another session of sharp losses across the board. After opening lower, the major indices briefly reversed into positive territory by mid-day, but the bears returned in the afternoon, sending all the main stock market indexes more than 5% lower. The Nasdaq Composite tumbled 5.1%, the Dow Jones Industrial Average 5.6%, and the S&P 500 6.7%. The small-cap Russell 2000 fell 6.6%, as the S&P Midcap 400 lost 7.8%. Like the previous day, all the major indices closed at their worst levels of the day, month, and past five years.

Turnover spiked higher in both exchanges, clearly signalling a rush to the exit doors on the part of mutual funds, hedge funds, and other institutions. Total volume in the NYSE zoomed 39% above the previous day’s level, while volume in the Nasdaq similarly rose 34%. NYSE and Nasdaq volume soared to its highest daily levels in weeks. Market internals were obviously pretty ugly, but better than Wednesday’s readings. Declining volume in the NYSE exceeded advancing volume by a margin of 14 to 1. The Nasdaq adv/dec volume ratio was negative by 10 to 1.

In yesterday’s commentary, we said, “But now that the major indices have broken down to new lows, steadier, more tradeable trends may develop, albeit to the downside. . .tradeable setups on the short side may develop by waiting for the next bounces into resistance of the breakdown levels. In the case of the inversely correlated UltraShort ETFs, this would equate to waiting for a pullback to the breakout levels.” After assessing the daily charts of the UltraShort family of ETFs, we came across two that we like for potential buy entry on a pullback. The first is UltraShort Oil and Gas ProShares (DUG), whose daily chart is shown below:

Designed to move in the opposite direction of the Oil and Gas sector, DUG broke out above resistance of its 50-day moving average yesterday (the teal line). DUG initially attempted to break out above its 50-day MA on November 12, but the stock market’s rally on November 13 caused it to fall back down. DUG also rallied above its intermediate-term downtrend line from the October 10 high (the dashed blue line), which roughly converged with the 50-day MA. We didn’t buy DUG on yesterday’s breakout because the market had just broken down below an obvious level of support. However, as per the plan mentioned above, we are now monitoring DUG for a potential buy entry on a pullback to its breakout, around the $46 to $47 area. For an approximate price target, we would look for DUG to move back to its prior high from October 10, around the $59 – $60 area. This equates to a 50% Fibonacci retracement from the October high to the November low. If buying DUG on a pullback, consider a tight protective stop below the November 20 low and 20-day MA (around $41) in order to protect against a possible failed breakout. As always, subscribers to The Wagner Daily will receive an Intraday Trade Alert if/when we decide to buy DUG.

Another inversely correlated ETF we’re monitoring for buy entry on a pullback is UltraShort Utilities ProShares (SDP), whose daily chart is shown below:

Prior to yesterday, SDP had been consolidating in a tight range for weeks, holding at support of both its 20 and 50-day moving averages. Yesterday, it broke out above the high of that consolidation, which also corresponds to a breakout above its intermediate-term downtrend line. We like SDP for entry on a pullback to the $92 area.

You may notice that SDP trades an average daily volume of only 45,000 shares. However, unlike individual stocks, in which liquidity can greatly affect how a stock trades, remember all exchange traded funds are synthetic instruments. As such, the amount of average daily volume that an ETF trades is, for the most part, irrelevant. Even if a particular ETF had no buyers or sellers for several hours, the bid and ask prices would continue to move in correlation with the market value of the ETF that is derived from the prices of the underlying stocks. An ETF with a low average daily volume may sometimes have slightly wider spreads between the bid and ask prices, but you can simply use limit orders if this is the case. Since we trade for points, not pennies, paying a few cents more on occasion is not a big deal.

In yesterday’s market analysis, we looked at the long-term monthly chart of the S&P 500. We suggested the index would likely test support of its year 2003 low (789), while the year 2002 low of 769 was a key area of long-term support. With yesterday’s S&P 500 closing price of 752, both of these support levels have been violated. Nevertheless, this does not mean the index is likely to continue plummeting lower without a significant bounce. On the contrary, we’re now looking at a potential “undercut” situation that often leads to short-term bullish price action. If the S&P 500 closes above 769 in today’s session, it could give traders a very good reason to start dipping a toe in the water on the long side of the market.

In terms of a reward-risk ratio, new longs at current prices, around support of six-year lows, make sense. Still, we think it makes more sense to wait for the major indices to rally into resistance of their 20 and 50-day moving averages, then initiate new short positions. As per our recent discussion, daytraders may find buying opportunities on the long side of the market, but swing trading on the long side is still quite dangerous. At the very least, we would require the main stock market indexes to move back above resistance of their 10-day moving averages before getting long in trades with a time duration of more than a few hours.

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Today’s Watchlist:

There are no new setups in the pre-market today. As per the commentary above, we’re monitoring both DUG and SDP (short positions) for potential buy entry on a pullback. However, with a potential “undercut” situation, we’re not thrilled about the reward-risk ratio of jumping in on the short side right now. We’ll assess the viability of these trades based on market conditions in the coming days. If we enter either position, we’ll promptly send an Intraday Trade Alert with details.

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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):
FXY long (150 shares from Nov. 19 entry) –

bought 103.77, stop 101.24, target new high (will trail stop), unrealized points = + 2.22, unrealized P/L = + $333

DGP long (500 shares total — 350 from Oct. 24 entry, 150 from Nov. 19 entry) –

bought 13.51 (avg.), stop HALF position at 12.48, HALF position at 11.48, target 17.28, unrealized points = + 0.00, unrealized P/L = + $0

Closed positions (since last report):

(none)

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

$22,653

Notes:

• Both FXY and GDX, which are relatively uncorrelated to the direction of the broad market, performed well yesterday. With a focus on capital preservation, we’re happy to have just a few positions at this time.
• 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