Commentary:

As anticipated, stocks followed up Tuesday’s “churning” with a sharp pullback across the board yesterday. After opening substantially lower, the major indices valiantly attempted to rebound later in the morning, but fell to new intraday lows later in the day. The Dow Jones Industrial Average shed 2.7%, the S&P 500 3.0%, and the Nasdaq Composite 3.2%. The small-cap Russell 2000 tumbled 3.4%, enabling us to lock in a quick, overnight gain of 4.6 points (7.6%) on UltraShort Russell 2000 ProShares (TWM), which we bought to hedge our long positions on January 6. The S&P Midcap 400 lost 3.3%. A modest bounce in the final minutes of trading enabled the main stock market indexes to finish above their worst levels of the day.

Total volume in the NYSE eased 8%, while volume in the Nasdaq decreased 6% below the previous day’s level. The lighter turnover in both exchanges enabled the S&P 500 and Nasdaq Composite to avert the label of a “distribution day.” However, remember that the prior day’s “churning” was already indicative of institutional selling into strength. Volume commonly decreases on losing days that follow concealed selling into strength near the highs.

In yesterday’s market analysis, we pointed out the buy setup in CurrencyShares Japanese Yen (FXY). After correcting down to support of its 50-day moving average for the first time in five months, we planned to buy FXY on a rally above the January 6 high. That buy entry point occurred right on the market’s open, and FXY subsequently moved higher throughout the day. Our entry, target, and stop prices for this trade are annotated on the daily chart below:

After discussing the “churning” and dismal performance of leading stocks on January 6, we concluded yesterday’s commentary by saying, “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.” Since yesterday’s 3% drop in the S&P 500 caused the index to close within 2% (18 points) of its 50-day MA, it appears our projected correction is under way. On the daily chart of the S&P 500, we’ve highlighted this important area of key price support for the current pullback:

Obviously, there’s no guarantee yesterday’s selling was just an orderly pullback that will soon be followed by another wave of buying, and a rally back up to the recent highs. After all, every other rally over the past six months has only led to new lows. Still, it doesn’t appear the broad market is ready to re-test its 52-week lows just yet. The simple fact that the S&P 500 is currently pulling back to support of its 50-day MA, rather than rallying into resistance of its 50-day MA makes a big difference in overall market sentiment. This is because mutual funds, hedge funds, and other market-moving institutions frequently use the 50-day moving averages as a gauge of overall market trend, and hence the aggressiveness of their buying operations.

It’s quite possible the stock market will eventually fall to new lows sometime in 2009; however, considering the extent of last year’s losses, the current intermediate-term rally could easily continue much higher before the bears resume control again. Remember to follow the price of the iShares 20+ year T-Bond (TLT) as an inversely correlated leading indicator of money flow into the overall equities markets. Monitoring the performance of leading individual stocks also tells us a lot about the health of the market’s intermediate-term rally that’s still alive and well.

---

Today’s Watchlist:

There are no new ETF trade setups in the pre-market today. Claymore Global Solar Energy (TAN) remains on our watchlist for potential pullback entry, but we first want to assess overall market action today. If we enter anything TAN, or anything else, we will promptly send an Intraday Trade Alert with details.

---

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):
INP long (250 shares from Dec. 9 entry) –

bought 29.21, stop 30.55 (see note below), target 35.70, unrealized points = + 2.01, unrealized P/L = + $502

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

bought 27.18, stop 28.70 (see note below), target 34.10, unrealized points = + 2.33, unrealized P/L = + $466 (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 = + 0.22, unrealized P/L = + $176

FXY long (200 shares from Jan. 7 entry) –

bought 107.10, stop 103.82, target 113.80, unrealized points = + 0.52, unrealized P/L = + $104

USO long (150 shares from Jan. 2 entry) –

bought 34.13, stop 31.30, no target (will trail stop), unrealized points = (0.86), unrealized P/L = ($129)

GDX long (150 shares from Dec. 26 entry) –

bought 31.40, stop 26.68, no target (will trail stop), unrealized points = (1.35), unrealized P/L = ($203)

Closed positions (since last report):

TWM long (200 shares from Jan. 6 entry) –

bought 58.99, sold 63.54, points = + 4.55, net P/L = + $906

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

$53,375

Notes:

• As per yesterday’s pre-market setup, FXY triggered for buy entry on the open. It subsequently acted well throughout the day.
• Sharp opening gap downs in both INP and FXI caused both positions to open well below our tight trailing stops. As such, the MTG Opening Gap Rules automatically went into effect, thereby lowering our stops to 15 cents below their respective 20-minute lows. Later in the day, upon realizing the new stop in FXI was right on support of its 20-day EMA, we sent an Intraday Trade Alert to lower the stop a little more, providing a bit of “wiggle room” below that short-term support level. For now, we’re keeping the same trailing stops in both positions, but will be watching them closely and trailing stops back up as we are able. Despite yesterday’s losses, both INP and FXI are still showing respectable gains since our entries. Further, the TWM position perfectly did its job of hedging our long exposure. The quick $906 profit in TWM made up for most of the unrealized gains FXI and INP gave back. Proactively micromanaging positions is quite beneficial in this market!
• 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 support@morpheustrading.com 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.

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