The Wagner Daily | January 15, 2009

Commentary:

Tuesday’s indecision resolved itself to the downside yesterday, as the major indices plunged sharply lower, slicing through key support of their late December lows. After showing significant losses on the open, stocks moved lower throughout the morning, then oscillated in a sideways range throughout the remainder of the day. The Dow Jones Industrial average shed 2.9%, the S&P 500 3.4%, and the Nasdaq Composite 3.7%. The small-cap Russell 2000 and S&P Midcap 400 indices tumbled 4.4% and 4.0% respectively. All the main stock market indexes finished just above their worst levels of the day.

Turnover was mixed. Total volume in the NYSE swelled 13%, causing the S&P 500 to register a bearish “distribution day.” Trading in the Nasdaq, however, declined 2%, enabling the index to avert the same negative label. The better performance of the Nasdaq “under the hood” was not surprising, as it was solely the Nasdaq that registered a bullish “accumulation day” on January 13. Nevertheless, market internals were about as ugly as they come! In the NYSE, declining volume trounced advancing volume by a whopping margin of 28 to 1. The Nasdaq adv/dec volume ratio was negative by 14 to 1. Such awful internals tell us there was nowhere to hide in yesterday’s broad-based selling.

In mid-December of 2008, sudden weakness in the dollar caused CurrencyShares Euro Trust (FXE) to rocket sharply higher, breaking out above its multi-month downtrend line in the process. But after rallying parabolically for a week, FXE began to retrace lower, and has been in correction mode since then. Now, FXE has pulled back to support of its 50-day MA, though it dipped just below it yesterday. If FXE holds this level, it sets up for potential buy entry on a rally above the high of the past two days. Take a look:

As we recently did when buying the CurrencyShares Japanese Yen (FXY) pullback to its 50-day MA, we will wait until the price action confirms it has stabilized before buying. With the FXY pullback to the 50-day MA, we bought the rally above the previous day’s high, then sold for a 5-point gain just a few days later. With FXE, our entry point is similar, but we will wait for the two-day high to be taken out, rather than just yesterday’s high. This forces FXE to confirm a little more that it is finding support at the 50-day MA. If the setup triggers for buy entry, a protective stop will be placed loosely below the January 14 low. On the upside, we’ll look to sell into strength as FXE nears its prior highs from last month.

As the U.S. dollar has bounced and the Euro has conversely pulled back, precious metals have been correcting from their recent highs as well. As with FXE, spot gold ETFs closed right at their 50-day MAs yesterday. This is illustrated on the daily chart of the leveraged DB Gold Double Long (DGP):

With the usual inverse correlation to the U.S. dollar, spot gold could rally alongside of FXE. Still, if looking for a buy entry into DGP, consider waiting for a rally above yesterday’s high of $15.92. Again, this will help to confirm support of the 50-day MA is going to hold. When trading any of the precious metals ETFs, be sure to keep a wide enough stop to avoid getting prematurely shaken out of the trade, as they have been quite whippy lately. Also, don’t forget to keep your risk in line by reducing share size in accordance with a wider than usual stop price.

In yesterday’s market analysis, we looked at the short-term downtrend lines of several of the major indices, charting with the hourly time interval. We then said of the January 13 price action that, “Unless that ultra short-term ‘double bottom’ is broken in today’s session, we should expect the SSO (and the S&P 500 Index) to break out above the short-term downtrend line shown above.” Obviously, support of the two-day low from January 12 and 13 was immediately shattered on yesterday’s open, thereby calling off all bets on the long side of the market unless the bearish gap down quickly reversed higher (it didn’t).

Since the S&P 500 and Dow Jones Industrials have now fallen below support of their late December “swing lows,” the intermediate-term bias of these indices has shifted from cautiously bullish to neutral. Though a “lower low” may develop from here, price action has not yet developed enough to definitively declare a bearish bias on the intermediate-term trends. Further, it’s notable that the Nasdaq Composite is still clinging to the vicinity of its December lows. If the Nasdaq manages to hold up, it could help the other indexes to move snap back above their prior lows as well:

Earnings season has begun kicking into high gear, as both Intel and JP Morgan Chase are slated to report their latest quarterly results today. Next week, a slew of other market-moving companies will report as well. We all know earnings reports are generally not expected to be impressive, but this is could be a good thing for the market if investors’ mental expectations are already low enough. With earnings reports, it’s always the stock market’s subsequent reaction that matters, not the actual results.

CORRECTION: In the third paragraph of our January 14 commentary, there was a typo. The correct ticker symbol for Ultra S&P 500 ProShares is “SSO,” but it was accidentally listed as “SDS.” Apologies for any confusion.

Today’s Watchlist:

CurrencyShares Euro Trust (FXE)
Long

Shares = 200
Trigger = 132.70 (above the two-day high)
Stop = 129.33 (loosely below the Jan. 14 low)
Target = 142.80 (test of recent highs)
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.

Open positions (coming into today):

stop 26.48

unrealized P/L = ($480)

MVV long (300 shares from Jan. 13 entry) –

bought 23.58, stop 21.38, no target (will trail stop), unrealized points = (1.90), unrealized P/L = ($570)

Closed positions (since last report):

net P/L = ($352)

TAN long (500 shares from Jan. 8 entry) –

bought 8.72, sold 7.27, points = (1.45), net P/L = ($735)

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

$10,734

Notes:

The broad market sell-off caused SLV and TAN to hit their stops yesterday. Regarding SLV, you may recall that our stop was raised to 10.22 when we added additional shares to the position. At the time, the 50-day MA was well below 10.22, so it was not a factor. Now, however, the 50-day MA has risen up to provide support right where we stopped out, at the 10.20 area. As such, we’ll be monitoring SLV for possible re-entry IF it convincingly moves above yesterday’s high.
Because the 50-day MA of GDX has risen in recent weeks, we’ve slightly adjusted the stop to be just below that level, not right at it.
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Edited by Deron Wagner,
MTG Founder and
Head Trader