Commentary:
Opening lower out of the starting gate, stocks initially showed resilience again by reversing into positive territory by mid-day, but the Dow’s fourth straight test of its 50-day moving average attracted the bears late in the day. In the final hour of trading, the major indices broke below clear support of this week’s consolidation patterns, triggering stops and sparking a substantial round of selling. The Dow Jones Industrial Average fell 2.2%, the S&P 500 2.9%, and the Nasdaq Composite 3.7%. Just as they’ve shown relative strength on recent “up” days, small and mid-cap stocks showed the most relative weakness. The Russell 2000 lost 5.3%, as the S&P Midcap 400 lost 4.7%. All the main stock market indexes closed just a bit above their intraday lows.
Turnover rose across the board, causing both the S&P 500 and Nasdaq Composite to register their first “distribution days” since the bullish reversal of December 2. Total volume in the NYSE rose 4%, while volume in the Nasdaq ticked 3% higher. One day of higher volume selling does not mean the current rally is in trouble, but it’s definitely the first warning sign to the bulls. In the coming days, we’ll definitely be on the lookout for more “distribution days” that would wreck the market’s overall bullish volume patterns we’ve been seeing.
Yesterday, the U.S. dollar broke support of its five-month uptrend, creating potential trade opportunities on the long side of the various currency ETFs. Presently, we’re monitoring the popular CurrencyShares Euro Trust (FXE). If you’re not familiar with this ETF, one share of FXE trades at approximately one hundred times the price of the euro to the U.S. dollar. Yesterday’s sell-off in the dollar caused FXE to gap up sharply, breaking out above resistance of its 50-day moving average for the first time since July of this year. This indicates at least an intermediate-term reversal of trend, but now we’re waiting for a pullback to near the breakout level in order to have a low-risk entry price. On the daily chart below, we’ve annotated the breakout level and possible entry price of FXE:
Yesterday’s sell-off caused the major indices to lose support of their short-term, clearly defined support levels. For traders expecting “bull flag” breakouts above the 50-day moving averages of the main stock market indexes, the late-day decline was obviously disappointing. But even though the break of support created additional overhead supply the market must now contend with, it’s way too early to say the counter-trend bear market bounce off the November lows is finished. On the contrary, most of the major indices are now at more significant support levels that could cause traders to step back in on the buy side. To illustrate this, check out the hourly chart of the Dow Jones Industrial Average:
On the chart above, the red horizontal line marks yesterday’s break of short-term support. The dashed blue line annotates more significant support of the hourly uptrend line from the November 21 low. What happens when an index breaks one level of support, but comes into another? The longer-term trendline is more significant. In the scenario above, it’s negative that the Dow fell below support of its short-term consolidation, but positive that the index has now come into support of its uptrend line that has been in place for the past three weeks. This is because a basic tenet of technical analysis states that longer-term trendlines always hold more bearing with regard to future price direction than shorter-term trendlines.
Another law of technical analysis is that a prior level of resistance becomes the new level of support, after the resistance is broken. This being the case, we can see on the daily chart of the Dow that the index has come into another major level of support that should hold even more bearing than the three-week uptrend off the lows:
On December 8, the Dow broke out above resistance of a downtrend line that had been in place for several months (the red descending line). That prior level of resistance should now provide price support. Further, the 20-day exponential moving average (the beige line) is still in play as a support level, as the Dow only closed a few points below it yesterday. The teal line overhead is the 50-day moving average, a major level of resistance we’ve been referring to all week. Overall, the 50-day MA continues to act firmly as resistance, but the Dow now has support of its three-week uptrend line, as well as support of its prior intermediate-term downtrend line that it broke out above on December 8. If you look at charts of the S&P 500 and Nasdaq Composite, you’ll see very similar patterns as well.
If technical analysis patterns alone worked 100% of the time, we’d all be billionaires by now. Rather, our purpose of continual trendline analysis on various chart intervals is merely to tip the odds slightly in our favor. Beyond that, having the patience to wait for proper entry points, as well as the discipline to honor protective stops, is the key to consistent, long-term profits in the stock market.
In yesterday’s Wagner Daily, we said the broad-based ETFs were buyable IF they broke out above the highs of their recent consolidation patterns (the “bull flags”), but we also warned against “jumping the gun” with new buy entries before the market confirmed the upward move. Since the breakout above the consolidation patterns never came, we avoided new trade entries yesterday, and no harm was done. Now, we’re avoiding new buy entries until the major indices prove they will hold their intermediate-term support levels illustrated above. If they don’t, we’ll consider conservatively jumping back into the short side of the market next week. Have a nice weekend!
Today’s Watchlist:
There are no new setups in the pre-market today. However, we’ll promptly send an Intraday Trade Alert if/when 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.
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Open positions (coming into today):
- Per Intraday Trade Alert, we targeted SSO for a potential buy entry yesterday morning, but the afternoon breakout never came. As such, SSO never triggered for buy entry and has been removed from our watchlist for now.
- 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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FXI long (200 shares from Dec. 5 entry) –
bought 27.18, stop 24.21, target 34.10, unrealized points = + 2.94, unrealized P/L = + $588
INP long (250 shares from Dec. 9 entry) –
bought 29.21, stop 26.38, target 35.70, unrealized points = + 1.65, unrealized P/L = + $413
SMH long (500 shares from Dec. 9 entry) –
bought 17.27, stop 16.08, target 19.71, unrealized points = (0.17), unrealized P/L = ($85)
Closed positions (since last report):
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(none)
Current equity exposure ($100,000 max. buying power):
- $22,289
Notes:
Edited by Deron Wagner,
MTG Founder and
Head Trader