--> The Wagner Daily

The Wagner Daily


Commentary:

Following a similar intraday pattern as the previous day, stocks became caught in a tug-of-war between the bulls and bears, but the bulls won again. After opening several percent lower, buyers lifted the major indices well into positive territory by mid-day, but an early afternoon sell-off caused stocks to fall back into firmly negative territory. Then, as with Tuesday’s session, the bulls returned in the final ninety minutes of trading, propelling the main stock market indexes back to their best levels of the day. The Nasdaq Composite rose 2.9%, the S&P 500 2.6%, and the Dow Jones Industrial Average 2.1%. Trading in sync with their large-cap brethrens for a change, the small-cap Russell 2000 and S&P Midcap 400 indices gained 2.7% and 2.5% respectively. The major indices again finished near their best levels of the day.

Turnover ticked slightly higher across the board, enabling the S&P 500 and Nasdaq Composite to score their second straight “accumulation days.” Total volume in the NYSE rose 2% above the previous day’s level, while volume in the Nasdaq increased 11%. When stocks rise on increasing volume, it’s a positive sign that mutual funds, hedge funds, pension funds, and other big money players are accumulating shares of stock. Still, because volume in both exchanges failed to move above 50-day average levels, institutions were not exactly making a mad dash for the “buy” button. Market internals were healthy, not overly extreme. In both the NYSE and Nasdaq, advancing volume exceeded declining volume by a margin of approximately 3 to 1.

If you’ve followed the broad market’s intraday price action over the past two days, it’s undoubtedly been indecisive and a bit whippy. However, a more subtle observation is the rare show of resilience stocks have displayed in each of the past two sessions. Throughout October and November, there were many days in which stocks rallied in the early afternoon, then nosedived into the close. But in each of the past two days, the broad market has displayed the inverse pattern. Further, despite the large sell-off of December 1, keep in mind the S&P and Dow have closed higher in seven of the last eight sessions. While it’s still too early to know whether the recent rally attempt will get legs, astute traders may be noticing the start of an important change in overall sentiment.

Aside from broad-based price gains on higher volume, markets also need to exhibit leadership among individual stocks in order for sustainable rallies to develop. Rather than a plethora of “oversold” stocks merely bouncing off their lows, yesterday’s session was also marked by meaningful, high volume breakouts in a handful of individual stocks. Like the market’s sudden, newfound ability to shake off early losses and close at its highs, the developing leadership of a select group of stocks is also encouraging.

A few weeks ago, amongst the whippy, highly volatile day-to-day price action of the stock market, we suggested that technical analysis was still working quite well, but the most reliable timeframes had changed. While the daily charts were a sloppy, choppy mess, we pointed out that trendlines, moving averages, and other classic chart patterns were still working on the shorter-term, intraday charts. This continues to be true. To illustrate this, let’s compare two different charts of Ultra S&P Midcap ProShares (MVV), a popular ETF proxy for the S&P Midcap 400 Index. The first chart below is of the daily timeframe, while the second chart is a 60-minute intraday chart:

If you only looked at the daily chart, MVV appears to be in “no man’s land,” near the middle of its short-term trading range. It is also stuck between support of its 10-day moving average below, and resistance of its 20-day exponential moving average above. But when you drill down to the shorter-term 60-minute time interval, notice how an uptrend line (the blue ascending line) has clearly been forming off the November 21 low. On both December 2 and 3, support of that hourly uptrend line triggered the late-day buying interest that enabled MVV to close at its intraday high both days.

Monitoring the hourly charts, in addition to the more common daily charts, is a great way to find very short-term buying opportunities on pullbacks to support. Hourly charts are also quite useful in setting protective stops, as a breakdown below the hourly uptrend lines is often a good place to close a long position that you want to manage conservatively. Just be aware that “stop hunts” below trendlines are common. As such, be sure to give your stops enough “wiggle room” to sustain quick probes below the trendlines that do not follow through to the downside. Yesterday, for example, the market’s early afternoon sell-off briefly caused MVV to dip below its hourly uptrend line by a few cents, but the only negative result was that sell stops were triggered if traders failed to allow enough “wiggle room.” As our MVV position continues to move higher, we’ll be using the hourly trendline as a general indicator for trailing stop placement. Continually trailing a stop higher during a fledgling rally enables one to maximize potential gains, while simultaneously reducing downside risk.

Despite the positive changes in market sentiment discussed above, we’re certainly not yet “out of the woods.” On a technical level, the big test will be whether or not the major indices are able to overcome resistance of last week’s highs. As we recently pointed out, the November 28 highs of the major indices also converged with their primary downtrend lines. Therefore, firm closing prices above last week’s highs will translate to both the formation of “higher highs” on the daily charts, as well as breakouts above the intermediate-term downtrend lines. The stock market’s ability to do so would likely trigger enough upside momentum to quickly send the major indices to test major resistance of their 50-day moving averages. At that point, we would need to re-assess overall conditions to determine whether to initiate new short positions into resistance of the 50-day MAs, or wait to see if further gains could develop on the long side. Rather than guessing either way, all we can do is focus on trading what we see, not what we think. What we see right now is moderately bullish momentum, albeit presently only in the short-term.

NOTE: The December 3, 2008 issue of The Wagner Daily contained a typo. In the third paragraph, the ticker symbol “MZZ” should be “MVV.”


Today’s Watchlist:


iShares Xinhau China 25 (FXI)
Long

Shares = 200
Trigger = 27.72 (above yesterday’s high and 50-day MA)
Stop = 24.21 (below the Dec. 1 “swing low”)
Target = 34.10 (probe above the October 2008 high)
Dividend Date = n/a

Notes = After forming a “higher low” in late November, FXI is now poised to break out above its 50-day MA and recent consolidation to form a “higher high.” We plan to buy the move above yesterday’s high, then sell into strength of the initial move, as it tests resistance of its October 2008 high.


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):

      MVV long (300 shares from Dec. 2 entry) –

      bought 19.90, stop 18.72, target 30.80, unrealized points = + 1.39, unrealized P/L = + $417

      XLU long (350 shares from Dec. 1 entry) –

      bought 29.48, stop 27.49, target 36.60, unrealized points = (0.13), unrealized P/L = ($46)

    Closed positions (since last report):

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

      bought 103.77, sold 107.21, points = + 3.44, net P/L = + $513

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

      bought 13.51 (avg.), sold 13.87, points = + 0.36, net P/L = + $170

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

      $16,660

    Notes:

    • We have raised the MVV stop to just below the 2-day low, which removes about half our initial capital risk from the trade.
    • Per Intraday Trade Alert, we sold FXY on a tightened trailing stop yesterday, locking in a gain of + 3.44 points.
    • DGP hit its trailing stop as well, though we’re still monitoring it (and its sibling GDX) for potential re-entry.
    • 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.

    Click here for a free trial to Morpheus Trading Group’s other newsletter services.

    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

Follow us on Twitter

Latest Tweets

@MorpheusTrading