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The Wagner Daily


Commentary:

Stocks got off to a scary start last Friday morning, as worse than expected jobs data sent the major indices approximately 3% lower within the first hour of trading. But despite having the perfect excuse for shooting itself in the foot, the market stabilized and reversed sharply higher in the afternoon. The Nasdaq Composite raced 4.4% higher, the S&P 500 climbed 3.7%, and the Dow Jones Industrial Average rallied 3.1%. The small-cap Russell 2000 and S&P Midcap 400 indices gained 4.9% and 4.8% respectively. All the major indices closed at their intraday highs, positioning stocks for a positive start this week.

Higher turnover accompanied last Friday’s gains, enabling both the S&P 500 and Nasdaq Composite to score a bullish “accumulation day,” the third within the past five trading sessions. Total volume in the NYSE rose 7% above the previous day’s level, while volume in the Nasdaq ticked 10% higher. Market internals were also quite healthy. In both exchanges, advancing volume beat declining volume by a margin of 6 to 1. Last week, there were three days of higher volume gains, and two days of lower volume losses. This price to volume relationship of the market hints at institutional of institutional buying, and is a refreshingly bullish change from the previous pattern of higher volume losses and lighter volume gains. We monitor daily volume patterns in the market because volume is the one technical indicator that never lies. Volume is also a leading, not a lagging, indicator of price action.

In the December 5, 2008 issue of The Wagner Daily, we illustrated the potential buy setup in iShares Xinhua China 25 (FXI). Specifically, we liked how FXI showed relative strength to the broad market last month by forming a “higher low,” while the major indices formed “lower lows.” That relative strength was again present in last Friday’s session; FXI remained in positive territory throughout the morning, even as the main stock market indexes showed losses of several percent. When the broad market began to reverse higher in the afternoon, FXI outperformed on the upside, breaking out above resistance of its 50-day moving average (MA) and recent consolidation as well. The breakout which triggered our buy order into FXI is shown on its daily chart below:

With the stock market set to open significantly higher this morning, FXI is already trading nearly 6% higher in the pre-market. If you happened to miss our initial entry into FXI, consider buying any pullback to support of the breakout area ($27.50 to $28), or the first touch of the 20-period exponential moving average (EMA) on the hourly chart. We expect FXI to continue outperforming on the stock’s market’s “up” days, while losing less than the major indices on the “down” days.

Another international ETF we’re monitoring is iPath India Index (INP). Unlike FXI, INP set a “lower low” alongside of the domestic markets in late November. However, it’s been showing relative strength in the short-term, and just closed above its 20-day EMA. A rally above last Friday’s high will also correlate to a breakout above both its intermediate-term downtrend line and short-term consolidation. The 50-day MA is still overhead, about 4 points above its current price, but momentum of a breakout could easily carry INP through its 50-day MA. Alternatively, one could quickly sell into strength and still lock in a decent gain if INP stalls on the test of its 50-day MA:

One of the few industry sector ETFs now trading above its 50-day moving average is Retail HOLDR (RTH). Despite weak reports on employment and consumer spending, retail has been seeing institutional money flow lately. Even though the actual reason for strength in the sector doesn’t matter, one could theorize that the bad news has already been built into the price of these stocks. As RTH rose above its 50-day MA last Friday, notice how volume also rose above its 50-day average level, indicating institutional demand:

For RTH, consider a buy entry on a pullback to new support of its 50-day MA, which also converges with the “swing high” of November 26 – 27. This is marked by the dashed horizontal line, around the $73.75 to $74 area.

As for the broad market, last week’s resilience was impressive. Though the benchmark S&P 500 fell nearly 9% on Monday, the bulls stepped in to limit the weekly loss to just over 2%. More importantly, all the major indices closed above their 20-day EMAs, and are also poised to breakout above their intermediate-term downtrend lines. If today’s pre-market strength remains to the opening bell, the major indices could have key technical breakouts as early as today. Take a look at the daily chart of the S&P 500 below (other stock market indexes have similar patterns as well):

On a more subtle note than the chart patterns of the market, we should also consider how stocks not only brushed off last Friday’s worse-than-expected employment data, but actually rallied sharply higher on the news. Throughout October and November, the stock market sold off on just the slightest amount of negative economic new. Now, however, we saw an instance where negative news led to a positive reaction to equity prices. Several times last week, we mentioned the previous bearish sentiment in the overall market was changing; last Friday’s session is more confirmation of such. We don’t know how long the bullishness of the counter-trend bounce will last before the bears resume control, especially with resistance of the 50-day moving averages still overhead. Nevertheless, we’ll take advantage of the most ideal short to intermediate-term ETF buying opportunities while we can.


Today’s Watchlist:

As per the commentary above, there are a few setups we’re monitoring for potential buy entry. However, because the futures markets are indicating a substantial opening gap higher this morning, we first want to make sure the market’s opening strength will hold before buying anything new. If the gap holds and we decide to enter anything new, we’ll promptly send an Intraday Trade Alert with details of the trade. ETFs on our current watchlist include: INP, RTH, RKH, GDX, XLU (possible re-entry), TLT (only on a significant pullback)


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):

      FXI long (200 shares from Dec. 5 entry) –

      bought 27.18, stop 24.21, target 34.10, unrealized points = + 0.65, unrealized P/L = + $130

    Closed positions (since last report):

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

      bought 19.90, sold 18.71, points = (1.19), net P/L = ($363)

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

      bought 29.48, sold 27.13, points = (2.35), net P/L = ($830)

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

      $5,566

    Notes:

    • Per Intraday Trade Alert, we lowered the trigger price to buy FXI last Friday afternoon. Now above its 50-day MA and recent consolidation, it looks great going into today.
    • Unfortunately, last Friday morning’s weakness caused MVV and XLU to hit their stops, despite using the MTG Opening Gap Rules to manage the XLU position. Still, it was important we followed the plan and honored our stops, as a breakdown below the short-term consolidation could have been pretty nasty. When the market reverses immediately after hitting our stop, we will often re-enter the position the same day, but we avoided doing so last Friday due to choppy action from the short-term consolidation. Now that the major indices are poised to break out above key resistance levels, there should be less “shakeouts” on the long side. We’ll be looking to selectively enter new ETF positions if the market proves it will hold the breakout.
    • 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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