Commentary:

Broad market indices followed through on Wednesday’s weakness by plunging more than 2% across the board in the first hour of trading. Backed by ugly internals and heavier volume, the morning session appeared to be delivering the knockout blow for investors clinging to the 50-day MA as support. But after a second wave down failed to push lower during the doldrums, markets reversed off the lows and ripped higher. From 1:pm to 3:pm, major averages blasted 4% higher, taking back all of the day’s losses and more. The Dow Jones Industrial average and S&P 500 were able to hold on for a positive close, finishing up 0.2% and 0.1% respectively. The Nasdaq Composite charged 1.5% higher. The small-cap Russell 2000 and S&P Midcap 400 led the way with a 1.7% and 2.0% gain respectively. The bullish reversal action allowed all the main stock market indexes close in the top 25% of the day’s range.

Total volume picked up significantly yesterday, coming in above the 50-day moving average for volume on both exchanges. NYSE volume surged 26%, and the Nasdaq 28%. Market internals on both the NYSE and Nasdaq were able to recover from negative readings to close in positive territory. The heavy volume and strong recovery in the internals certainly gives yesterday’s reversal action more credibility.

We have been stalking DGP for a buy entry over the past few days, patiently waiting for a strong entry point. Yesterday’s bullish reversal candle provided us with a high quality entry, when it reclaimed the 50-day MA around 2:pm. Per intraday alert we are long from 15.60.

Due to the inverse correlation between gold and the US Dollar, its best to monitor support and resistance levels in UUP before establishing a long position in gold. As the chart below shows, UUP has run into resistance of the 50-day MA and stalled out at the prior swing high. There is also resistance from the prior support level at 26.00.

Revisiting Wednesday’s analysis of the short-term 60-minute (hourly) downtrend lines, we’ve annotated the same hourly charts of the Ultra S&P 500 ProShares (SSO), and the Ultra QQQ ProShares (QLD).

Both ETF’s look poised to break above their hourly downtrend lines after yesterday’s sharp recovery. A rally to reverse a downtrend that starts with a sharp move off the lows is often the most productive, as it tends to leave those waiting to buy a deeper pullback in the dust. There is plenty of overhead resistance in the form of moving averages and prior swing highs, so whether or not a break of the hourly downtrend lines will produce anything more than a short-term bounce in the broad market remains to be seen. So what will it take for us to switch our bias from neutral to bullish? A great start would be a heavy volume breakout above the 50-day moving averages in the broad market, accompanied by strong internals, and leadership stocks breaking out to new highs on big volume. Simple, right?

Our main concern with yesterday’s action was the extreme relative weakness in the financial sector. The $BIX (Banking Index) plunged nearly 10%, behind ugly selling in BAC, WFC, and JPM (even a unexpected positive earnings report from JPM couldn’t prevent it from closing down more than 6%). Below is a relative strength chart using a 5-minute timeframe, comparing the percentage gains between the S&P 500, Nasdaq, and $BIX.

While the financial stocks do not necessarily have to lead this market higher, they need to at the very least tread water. We can’t see this market successfully defending the November lows with the financial sector breaking down once again.

The U.S. stock market will closed on Monday, January 19. As such, The Wagner Daily will not be published on January 19, but regular publication will resume on January 20.

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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 = No change in parameters, as yesterday’s shakeout/reversal bar is bullish.

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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):
DGP long (350 shares from Jan. 15 entry) –

bought 15.60, stop 13.78, target 21.70, unrealized points = + 0.05, unrealized P/L = + $14

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

bought 31.40, stop 26.48, no target (will trail stop), unrealized points = (2.27), unrealized P/L = ($342)

Closed positions (since last report):

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

bought 23.58, sold 20.85, points = (2.73), net P/L = ($825)

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

$9,847

Notes:

• Per intraday alert, we stopped out of MVV beneath the 20-minute low.
• Per intraday alert, we bought the bullish reversal candle in DGP at the 50-day MA.
• 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.
• 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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Edited by Deron Wagner,
MTG Founder and
Head Trader