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The Wagner Daily


Commentary:

Stocks concluded an ugly week on a positive note last Friday, as the major indices zoomed higher on mixed volume. The broad market oscillated in a sideways range throughout most of the day, then blasted off in the final hour of trading. The blue-chip Dow Jones Industrial Average gained 6.5%, as the benchmark S&P 500 Index rallied 6.3% and moved back above pivotal support of its October 2002 low. The Nasdaq Composite advanced 5.1%, the small-cap Russell 2000 climbed 5.5%, and the S&P Midcap 400 closed 5.9% higher. All the main stock market indexes finished at their intraday highs, but in the bottom half of the week’s trading ranges.

Total volume in the NYSE increased 4% over the previous day’s level, but turnover in the Nasdaq decreased by the same percentage. Although the higher volume gain of the NYSE technically enabled the S&P 500 to register a bullish “accumulation day,” the volume increase was probably attributed to last Friday being monthly options expiration day. It’s also discouraging that, even with the effect of options expiration, Nasdaq volume still limped in lower. Sharply higher trading across the board would have pointed to buying on the part of mutual funds, hedge funds, and other institutions.

Last Friday, our position in Gold Double Long (DGP) finally made a significant move. Gapping up above resistance of its 20-day exponential moving average on nearly double its average daily volume, DGP surged 14% higher. Although resistance of its 50-day moving average is now just overhead, the spot gold continuous futures contract (@YG) has already broken out above its 50-day MA. Since DGP follows the price of spot gold, at a 2 to 1 margin, the level of moving averages on the chart of spot gold itself is more important than that of DGP. Below, we’ve applied Fibonacci retracement lines to the chart of DGP, in order to get an idea of how far the newfound gold strength may take it (standard moving averages removed so you can more easily see the Fibonacci lines):

With an average entry price of 13.51, our upside target in DGP is between the 50% and 61.8% Fibonacci retracement levels, around $17 to $17.50 At that level, we’ll look to sell into strength to lock in a very large percentage gain. If gold subsequently consolidates for a few weeks, then breaks out again, we’ll be prepared to re-enter DGP just as quickly.

On November 20, the S&P 500 fell below its October 2002 low and closed at its lowest level since 1997. In the following morning’s Wagner Daily, we said, “With yesterday’s S&P 500 closing price of 752, both of these support levels (the year 2002 and 2003 lows) 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.” Since the S&P 500 ripped back above its year 2002 low last Friday, an “undercut” of those lows is exactly what happened. This is shown on the monthly chart of the S&P 500 below:

In bear markets, “capitulation” is what occurs when the last of the die-hard bulls finally surrender to panic and sell their positions at any ol’ price. It often happens after the major indices have been plummeting without reprieve, then subsequently break below a major level of support. Capitulation is necessary in order for bear markets to eventually form a significant bottom and attract a new round of punters who will drive the market higher. With last week’s “undercut” of the S&P 500’s year 2002 low, traders will be speculating as to whether or not we have finally seen capitulation.

Though we believe the “undercut” could indeed lead to a tradeable, counter-trend bounce in the short to intermediate-term, it may be dangerous to assume we’ve actually seen capitulation. One thing we don’t like is that volume levels remained relatively moderate when the S&P 500 broke support. Typically, such key breaks of support are accompanied by monstrous volume spikes that occur when the last of the bulls finally “throw in the towel;” in October alone, there were several days in which turnover exceeded the volume of November 20 and 21. Still, market bottoming is often a process, not just a one-time event. It’s possible the “capitulation,” if it has occurred, may have been more gradual and subtle this time.

Last Friday’s rally was encouraging, but don’t forget there have been three other instances of similarly large gains in the broad market over the past five weeks. Each bounce failed to gain any traction and fizzled out very quickly. Therefore, until the market proves last Friday’s rally was not just a “flash in the pan,” we need to remain defensive. If the reversal turns out to be for real, there will be plenty of time to participate in the recovery.

Because the lows of October 2008 were a significant level of price support until recently, we must now expect those lows to act as new resistance if stocks attempt to build on last Friday’s rally. On the daily chart below, notice this resistance is around the 840 – 850 area:

If the S&P 500 manages to move back above resistance of its October lows, as shown above, we would then feel comfortable conservatively jumping back in the long side of the market on the first pullback that follows. Also, notice the 10-day moving average (the dashed purple line) has converged with resistance of the S&P 500’s October lows. This goes along with how we concluded last Friday’s market commentary by saying, “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.”

If the major indices rally above their October 2008 lows and 10-day moving averages, expect the 20 and 50-day moving averages to provide significant resistance. As the main stock market indexes start to move towards their 50-day moving averages (the teal line on the chart above), we would plan to sell long positions into strength. That would also be an ideal level to enter new short positions, in anticipation of a resumption of a the dominant downtrend.

Until the market begins to prove otherwise, daytrading continues to offer a better overall chance of profit than holding positions overnight with the expectation of catching a trend. Again, the focus of The Wagner Daily newsletter has never been daytrading, and it still isn’t, but we’re simply taking what the market gives us. For now, the two best choices are intraday trading of ETFs with relative strength or sitting in cash on the sidelines until the market proves its indecision and erratic behavior has settled down. Though we have two open positions (CurrencyShares Japanese Yen [FXY] and Double Gold Long [DGP]), neither is directly correlated to the direction of the stock market.


Today’s Watchlist:

There are no new setups in the pre-market today. As per the commentary above, we’re staying clear of the long side of the broad market (with the exception of possible daytrades) until we see more price confirmation. On the short side, we were monitoring both DUG and SDP (inversely correlated ProShares ETFs), both of which broke out above resistance on November 20. However, their retracements were too steep last Friday, invalidating the plays to buy them on a pullback to support of their breakout levels. As always, we’ll promptly send an Intraday Trade Alert if 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.

    Open positions (coming into today):

      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 = + 1.89, unrealized P/L = + $945

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

      bought 103.77, stop 101.24, target new high (will trail stop), unrealized points = + 0.32, unrealized P/L = + $48

    Closed positions (since last report):

      (none)

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

      $23,313

    Notes:

    • No changes to open positions at this time. DGP looking good!
    • 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

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