Commentary:

Rather than waiting for the Fed to provide the fireworks at 2:15 pm, major indices gapped nearly 2% higher on the open due to news of the government establishing a “bad bank” to remove toxic debt off the balance sheets of existing banks. The news was sweet music to the ears of the banking index ($BIX), which closed 20% higher. As we have mentioned over the past week, a rally in the financials would provide a spark for the broad market, and we were not let down. Not to say that yesterday’s Fed meeting was a non-event, but the strength in financials was the main attraction. Overall, the post-Fed volatility wasn’t too bad, as broad market indices were able to hold on to the majority of the day’s gains with a strong push into the close. The Russell 2000 and the S&P Midcap 400 gained 3.9% and 3.7% respectively. The Nasdaq Composite at 3.5% and S&P 500 at 3.4% were not far behind. The Dow Jones Industrials was once again the laggard with a 2.5% gain.

The strong increase in turnover confirmed the price action, as NYSE volume came in 22% higher, and finished above the 50-day moving average of volume. Nasdaq volume climbed 19% above the prior session, and also closed above the 50-day moving average of volume. The heavy volume suggests that institutions were actively buying up stocks, as both the Nasdaq and S&P 500 registered a bullish accumulation day.

We mentioned earlier this the week that the $BIX was due for a bounce with a move above 85.00, as it made an obvious undercut of the November lows after plummeting more than 30% in two weeks. We expect the financials to push higher, fueled by short covering from those trapped by yesterday’s rather large gap up. Below is the 5-minute chart detailing the relative strength in the banking index over the S&P 500. These small clues are valuable to short-term traders looking to gain an edge on the broad market. For example, if the S&P 500 was breaking out to new intraday highs yesterday on the open while the banking index was breaking down, a trader could hold off on buying new longs in anticipation of the S&P 500 pulling back due to the weakness in banks. Please note that although we are keying off the banking index right now because it is the “hot hand”, that does not mean that this will be the case next week, as market dynamics are constantly changing.

In Tuesday’s report we highlighted the bullish pullback to support in the SPDR High Yield Bond ETF (JNK). JNK broke out above the short-term downtrend line on a pick up in volume yesterday (see chart below). The 200-day moving average is the target for an intermediate-term swing trade (around 38.00). HYG, the iShares High Yield Corporate Bond also broke a short-term downtrend line on heavier volume.

We continue to hold our long position in the DB Gold Double Long ETN (DGP), which has pulled back to support of the breakout pivot. We could see one or two more days of corrective action before it resumes the uptrend. Gold ETFs are pretty volatile, so it would not be unusual to see a pullback to the 20-day EMA at 17.50.

The U.S. Gasoline Fund (UGA) looks poised to break above the downtrend line of a two month bottoming pattern. We like the tight-ranged price action over the past few weeks that has held above 20.00. We are stalking UGA for a buy entry on a breakout above 23.10, over the downtrend line and the high of 1/26/09.

Overall, yesterday’s session was a very positive sign for the broad market. We must take notice of the strong percent gains, combined with the heavy volume and bullish market internals (NYSE advancing volume beat declining volume by a very healthy 8 to 1 margin). So where does the market go from here? We mentioned earlier this week that a rally in the S&P 500 could reclaim the 50-day MA with ease, but would have trouble breaking the highs of mid-December (900-910). Once the S&P 500 tests the 900 area and pulls back, we will see how the price and volume action holds up, providing us with valuable clues as to the direction of the next intermediate-term swing in the market. For now we are expecting a pullback to the hourly 20-EMA on the S&P 500 over the next few days, as all strong trends typically find short-term support at this level.

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Today’s Watchlist:

As per above, we’re stalking UGA for potential long entry, and will promptly send an Intraday Trade Alert with trade details if/when the setup triggers.

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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 (450 shares from Jan. 15 & 23 entries) –

bought 16.20(avg), stop 16.45, target 21.70, unrealized points = + 2.39 unrealized P/L = + $1,071

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

bought 31.40, stop 26.48, no target (will trail stop), unrealized points = + 1.33, unrealized P/L = + $198

Closed positions (since last report):

(none)

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

$13,275

Notes:

• 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