The Wagner Daily | February 5, 2009

Commentary:

Building on the Nasdaq’s recent bullish momentum, stocks got off to a strong start yesterday morning, but the troublesome 50-day moving average gave traders an excuse to sell in the afternoon. Up more than 2% at its morning high, the Nasdaq broke its short-lived winning streak by settling 0.1% lower. The S&P 500 and Dow Jones Industrial Average surrendered smaller intraday gains, falling 0.8% and 1.5% respectively. The small-cap Russell 2000 slid 1.0%, as the S&P Midcap 400 dipped 0.2%. Opposite of the previous day, the main stock market indexes closed near their intraday lows.

Turnover ran higher throughout the day, causing a potential “accumulation day” to morph into a session of higher volume losses. Total volume in the NYSE increased 3%, while volume in the Nasdaq rose 7% above the previous day’s level. Wednesday’s “distribution day” marked the second occurrence of institutional selling within the past four sessions. A healthy market can typically absorb three to four days of higher volume losses, but more than four “distribution days” within a three to four-week period is often an intermediate-term death-knell to the stock market. Further, since the current market certainly does not qualify as “healthy,” the overhead supply created from just this week’s two days of higher volume selling has the potential to spark a substantial sell-off in the near-term.

If yesterday’s weakness picks up momentum, the number of decent short selling opportunities should start to increase. One such ETF that may be in play in the coming days is UltraShort Oil and Gas ProShares (DUG). The setup is shown on the daily chart below:

On the chart above, notice how the four-month downtrend line of DUG is now converging with resistance of the 50-day moving average (the teal line). We like DUG for buy entry on a rally above that convergence (the $26 area), which also puts DUG above its February 2 high. Additionally, DUG is now forming the right shoulder of an “inverse head and shoulders” pattern. The left shoulder formed in December, the head at the beginning of January, and right shoulder has been forming for the past several weeks. A rally above the December high ($28 area) would break the “neckline.”

Like the rest of the “Short” and “UltraShort” ETFs from ProShares, DUG is designed to move in the opposite direction of its underlying sector (oil and gas). DUG also moves with greater volatility than many ETFs because it uses derivatives to provide leverage. Since DUG is inversely correlated to the direction of oil and gas, one can enter a bearish position simply through buying DUG, rather than initiating a traditional short sale. The greatest benefit of buying the inversely correlated ETFs, rather than selling short “normal” ETFs, is that bearish positions can now be entered in retirement accounts such as IRAs. Short selling, on the other hand, is not permissible because IRAs are non-marginable, cash accounts. Another benefit of trading the inversely correlated ETFs is a psychological one, as some traders have a mental block against the mechanics of short selling.

Several days ago, we discussed the tug-of-war that was taking place between the relative strength of the Nasdaq, and the weakness of the Dow. Until yesterday, it was starting to look as though the Nasdaq may win the battle, dragging the Dow higher in the process, but now the Dow has fallen back down to test its January lows. Although the Nasdaq zoomed well above its 50-day moving average yesterday morning, its nearly flat close means that pivotal test of resistance is still in play. Corporate earnings season, still in full-swing, is likely to throw more unexpected curveballs as well. Be alert and prepared for continued indecision in the short-term.

Today’s Watchlist:

UltraShort Oil and Gas ProShares (DUG)
Long

Shares = 150
Trigger = 26.03 (above the Feb. 2 high)
Stop = 21.92 (below the low of the “right shoulder”)
Target = 39.90 (near resistance of the Nov. 2008 high)
Dividend Date = around March 23, 2009

Notes = See commentary above for explanation of the setup. Also, please be sure to read the “Reminder to Subscribers” below.

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):

unrealized P/L = + $1,418

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

bought 31.40, stop 26.48, no target (will trail stop), unrealized points = + 2.66, unrealized P/L = + $399

IBB long (150 shares from Feb. 3 entry) –

bought 72.12, stop 68.52, target 78.80, unrealized points = + 0.82, unrealized P/L = + $123

UGA long (200 shares total — 100 from Jan. 29 entry, 100 from Jan. 30 entry) –

bought 23.42 (avg.), stop 20.49, target 30.45, unrealized points = (0.99), unrealized P/L = ($198)

Closed positions (since last report):

net P/L = ($98)

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

$29,243

Notes:

Due to significant strength and the Nasdaq’s attempted breakout yesterday morning, we made a judgement call to sell SRS for a scratch (small gain or loss) when it fell below the prior day’s low. All four of our other open positions moved higher yesterday, despite losses in the broad market.
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