Commentary:
A choppy and indecisive day of trading led to a round of moderate gains yesterday, as turnover in the Nasdaq returned to average levels. The S&P 500 advanced 0.8% and the Dow Jones Industrial Average rose 0.7%, while relative strength in the tech arena enabled the Nasdaq Composite to gain 1.5%. The small-cap Russell 2000 and S&P Midcap 400 indices climbed 1.9% and 1.6% respectively. Despite the substantial gains of the broad market, it’s notable that stocks actually closed at or below their opening prices; the broad-based advance was merely the result of an upside opening gap. Like the previous day, all the major indices settled near the middle of their intraday trading ranges.
Trading in the Nasdaq swelled 23% above the previous day’s level, enabling total volume in the exchange to exceed its 50-day average level for the first time in more than two weeks. Trading in the NYSE, however, edged just 1% higher. When stocks rise on higher volume (an “accumulation day”), it is usually a bullish sign that hints at institutional buying. But this time, it would be deceiving to blindly declare yesterday an “accumulation day.” This is because higher volume on a choppy, range-bound session of trading that occurs after the market has registered a series of gains is typically caused by stealth institutional selling into strength. This is also known as “churning,” and such action provides an early warning to observant traders that the market may enter a correction in the coming days.
CurrencyShares Japanese Yen (FXY), one of the strongest ETFs in the fourth quarter of 2008, has been in correction mode for the past several weeks. Yesterday, it dropped an additional 0.5% to close right at key support of its 50-day moving average. On the daily chart of FXY below, notice it was the first touch of the 50-day MA since the current, long-term uptrend began:
Because it is the first touch of the 50-day MA since the primary uptrend of FXY began, a buy entry near its current price is not a bad idea. However, in order to prevent getting whipsawed out of the trade with a slightly premature entry, consider at least waiting for the price of FXY to move back above resistance of its 20-period exponential moving average on the hourly chart (20-EMA/60 min.). Presently, that correlates to a rally above the $106.88 level. As FXY is a currency ETF, one bonus is that it has a low correlation to the direction of the overall stock market. Regular subscribers to The Wagner Daily should note our detailed trigger, stop, and target prices for this setup below.
In addition to yesterday’s perceived “churning” in the broad market, we also were disappointed with the action of most leading stocks. Though this newsletter focuses on ETFs, not individual stocks, monitoring the price action of top-performing stocks is a great way to stay on top of the health of the overall market. When a select group of top stocks is breaking out to new highs, it drives the broad market higher. But when those stocks suddenly start failing their breakouts, it’s often a leading indicator of a potential correction in the major indices. On January 5, a plethora of leading stocks surged higher while the main stock market indexes closed slightly lower. Yesterday, however, we saw the opposite action; many leading stocks sold off sharply while the broad market closed higher (only because of the opening gap up). This was not encouraging for the near-term direction of the broad market.
Upon observing the “churning” and dismal performance of leading stocks yesterday, we bought the inversely correlated UltraShort Russell 2000 ProShares (TWM), a bearish position in the broad market. While our model portfolio is still net long, TWM will serve to hedge the risk in those long positions. We’ve also trailed our protective stops much higher in both iShares Xinhua China 25 (FXI) and iPath India Index (INP) in order to lock in a majority of our unrealized gains if the stock market suddenly reverses. Our other open positions in the commodity-related ETFs (SLV, GDX, USO) are not as directly correlated to the direction of the stock market. Though we certainly don’t have enough confirmation to declare the end of the market’s seven-week rally, a substantial pullback to at least the 50-day MAs is quite realistic. Having a more balanced portfolio should serve to limit our risk and minimize volatility of our gains in the near-term.
Today’s Watchlist:
CurrencyShares Japanese Yen (FXY)
Long
Shares = 200
Trigger = 107.04 (above the 20-EMA/60 min.)
Stop = 103.82 (below yesterday’s low, plus some “wiggle room”)
Target = 113.80 (test of December 17 high)
Dividend Date = n/a
Notes = See commentary above for explanation of the setup.
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 added 200 shares to our SLV position. New average price on full position is shown above.
- Per Intraday Trade Alert, we bought 200 shares of TWM late yesterday afternoon. Because of churning action in the market, this trade was taken as a hedge against some of our long positions. However, the potential reward is significant if the market enters into a correction within the next several days.
- Stops have been trailed higher in INP, FXI, SLV, and USO. Note the stops in INP and FXI are now very tight, just below yesterday’s lows and the 20-EMAs/60 min. If the market enters into a correction, these stops will enable us to lock in most of our current profit, while still allowing for further gains if the uptrend continues.
- For those of you whose ISPs occasionally deliver your e-mail with a delay, make sure you’re signed up to receive our free text message alerts sent to your mobile phone. This provides a great way to have redundancy on all Intraday Trade Alerts. Send your request to [email protected] if not already set up for this value-added feature we provide to subscribers.
- On December 23, FXI traded “ex-dividend,” following a dividend distribution of 21 cents per share. As such, our unrealized gain is now the actual point gain, plus the 21 cents per share that will be separately paid to your account by year-end. We have also lowered our stop to account for the dividend distribution, as well as putting the stop back below the 50-day MA. We’ve also given the INP stop a little more “wiggle room” to account for accentuated volatility that occurs on light volume days. The INP stop is now at breakeven.
- 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 33.67, target 35.70, unrealized points = + 5.06, unrealized P/L = + $1,265
FXI long (200 shares from Dec. 5 entry) –
bought 27.18, stop 31.13, target 34.10, unrealized points = + 4.59, unrealized P/L = + $918 (see note below)
SLV long (800 shares total; 600 from Dec. 26 entry, 200 from Jan. 6 entry) –
bought 10.64 (avg.), stop 10.22, target 13.45, unrealized points = + 0.70, unrealized P/L = + $560
USO long (150 shares from Jan. 2 entry) –
bought 34.13, stop 31.30, no target (will trail stop), unrealized points = + 3.12, unrealized P/L = + $468
GDX long (150 shares from Dec. 26 entry) –
bought 31.40, stop 26.68, no target (will trail stop), unrealized points = + 1.21, unrealized P/L = + $182
TWM long (200 shares from Jan. 6 entry) –
bought 58.99, stop 55.30, target 69.30, unrealized points = (0.18), unrealized P/L = ($36)
Closed positions (since last report):
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(none)
Current equity exposure ($100,000 max. buying power):
- $46,193
Notes:
Edited by Deron Wagner,
MTG Founder and
Head Trader