Commentary:
After more than a week of deliberation between key support and resistance levels, the major indices convincingly broke out yesterday, closing above their 50-day moving averages for the first time in four months. Stocks gapped higher on the open, trended north throughout the morning, then kicked into overdrive upon the afternoon announcement that the Fed Funds Rate had been lowered to a target range of 0% to 0.25%. Though a half-point cut was widely expected, investors responded positively to the Fed’s suggestion they were willing to take rates all the way down to zero if necessary. The Nasdaq Composite surged 5.4%, the S&P 500 5.1%, and the Dow Jones Industrial Average 4.2%. The small-cap Russell 2000 rocketed 6.7% higher, as the S&P Midcap 400 motored to a 6.1% gain. Bulls retained control into the closing bell, causing the main stock market indexes to finish at their best levels of the day.
Not surprisingly, turnover swelled across the board, enabling both the S&P 500 and Nasdaq Composite to score an “accumulation day” that was indicative of institutional buying. Total volume in the NYSE rose 23% above the previous day’s level, while volume in the Nasdaq increased 31%. Unfortunately, volume still remained below 50-day average levels, but this could be attributed to seasonally light holiday volume in the latter half of December. Market internals were stellar. Advancing volume in the NYSE crushed declining volume by a margin of 16 to 1. The Nasdaq adv/dec volume ratio was similarly positive by 14 to 1.
The ability of the major indices to close above their 50-day moving averages for the first time since August confirms the change to bullish sentiment we have been observing in recent weeks. Since mutual funds, hedge funds, and other institutions commonly use the 50-day moving average as an indicator for intermediate-term trend direction, program trading on the buy side could send the market significantly higher in the coming weeks. Nevertheless, since the major indices remain in long-term downtrends, we still cannot classify the current strength as more than a tradeable, counter-trend bounce. Regardless, as we mentioned a few days ago, it makes sense to take advantage of the strength while it lasts.
To get an educated idea of just how long this rally may last before running out of gas, let’s take an updated look at daily charts of the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite. First is the chart of the benchmark S&P 500 Index:
The two dashed, horizontal lines on the chart above represent the next areas of price resistance for the S&P 500. The first, at the 919 level, is formed by the prior highs of last week’s breakout above the 20-day exponential moving average (the beige line). At just 0.7% above yesterday’s closing price, it’s unlikely this level will offer much resistance, but it’s notable nevertheless. Odds are good that short-term momentum of yesterday’s breakout above the 50-day moving average (the teal line) will enable the S&P 500 to move above the 919 level within the next few days. The next major area of resistance is the vicinity of the November 4 high, just over the 1,000 level (10% above the current price). If the index has enough mojo to rally to its November high, it’s a good point to sell any long positions into strength, or at least trail tight protective stops to protect profits. At that time, we’ll re-assess market conditions to determine whether it’s time to jump back in on the short side of the market, or just hang loose in anticipation of further strength. Next, take a look at the daily chart of the blue-chip Dow Jones Industrial Average:
As with the S&P 500, the Dow also has resistance just above its current price, at the 9,026 area. With a similar overall pattern to the S&P 500, the November 4 high of 9,654 will be a significant level of price resistance in the intermediate-term. Again, any approach of the November high presents an ideal place to sell long positions into strength (assuming the rally doesn’t fizzle out before then). Finally, here’s the Nasdaq Composite:
Surprise! The Nasdaq chart pattern resembles those of the S&P and Dow. 1,603 is the very short-term resistance, while the November high is at 1,786. Again, if trading in the Nasdaq, one could follow the same plan of selling into strength and/or getting short on a test of the November high. For all three of the major indexes, all bets are off on the long side of the market if any of the major indices suddenly reverse to close below key support of their December 12 “swing lows.” Such price action would be representative of a failed breakout, which would be quite bearish if it occurs at the 50-day moving averages.
Presently, we have four open ETF positions in our model account (FXI, INP, SMH, and QLD). All are now showing a nice profit since their entry points, which range from December 5 to 12. However, we plan to continually trail stops higher in the coming days, so as not to be complacent about the market’s likelihood of moving higher. When positions begin trending steadily, support of the 20-period exponential moving average on the hourly chart interval is a good guideline for trailing stops higher. This is discussed more thoroughly in my book, Trading ETFs: Gaining An Edge With Technical Analysis. Though the overall market is acting better than it has for months, don’t fall in love with your positions. Above all, remember to trade what you see, not what you think!
Today’s Watchlist:
There are several new ETFs we’re monitoring for potential buy entry behind the scenes. One of those is iShares Nasdaq Biotech (IBB), which we analyzed in yesterday’s commentary. It broke out firmly above its recent consolidation and 50-day MA, so we will now look for a pullback to near support of the breakout for potential buy entry (around the 67.50 to 68 area). If we see an ideal entry in IBB, or any other ETF, we’ll promptly send an Intraday Trade Alert with details of the trade. Otherwise, we’ll just focus on managing our existing four open positions for maximum profitability.
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):
- All our open positions continue to act well. In red text above, notice stops have been raised higher on most of our positions. We’ll continue to trail stops higher based on future price action. Also, remember that positions are automatically sold into strength if any ETF hits its target price listed above.
- 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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INP long (250 shares from Dec. 9 entry) –
bought 29.21, stop 29.78, target 35.70, unrealized points = + 4.57, unrealized P/L = + $1,143
FXI long (200 shares from Dec. 5 entry) –
bought 27.18, stop 26.88, target 34.10, unrealized points = + 3.99, unrealized P/L = + $798
QLD long (300 shares from Dec. 12 entry) –
bought 26.08, stop 25.12, target 32.60, unrealized points = + 2.42, unrealized P/L = + $726
SMH long (500 shares from Dec. 9 entry) –
bought 17.27, stop 16.78, target 19.71, unrealized points = + 1.33, unrealized P/L = + $665
Closed positions (since last report):
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(none)
Current equity exposure ($100,000 max. buying power):
- $32,529
Notes:
Edited by Deron Wagner,
MTG Founder and
Head Trader