Commentary:

If you missed yesterday’s intraday price action and only saw the mixed closing prices of the major indices, you understandably might have assumed it was a calm session — but it was far from it! Instead, yesterday’s volatile session was a roller coaster of indecision that undoubtedly was equally challenging for bulls and bears. The broad market opened sharply lower, reversed and drifted higher throughout the morning, plunged to new intraday lows in the afternoon, then abruptly reversed and violently ripped to new intraday highs in the final forty-five minutes of trading. Thanks to the closing rally, the Nasdaq Composite turned a 2.3% intraday loss into a 0.7% closing gain. The Dow Jones Industrial Average finished 0.1% lower, but was staring at a 3.1% loss less than an hour earlier. The S&P 500 settled with a 0.2% gain. The small-cap Russell 2000 and S&P Midcap 400 indices registered matching advances of 0.5%. Each of the major indices closed at its high of the day.

Total volume in the NYSE increased 9% above the previous day’s level, while volume in the Nasdaq similarly ticked 10% higher. More notable than the “accumulation day” in the S&P 500 and Nasdaq, generated by the higher volume gains, is that nearly all the increased turnover occurred during the closing rally, not when stocks were heading south earlier in the day. One hour before the close, for example, when the major indices were deeply in negative territory, volume in both the NYSE and Nasdaq was tracking only 1% higher than the previous day’s levels at the same time of day. But turnover raced higher during the massive closing rally, enabling volume in both exchanges to finish 9 – 10% higher. This tells us institutions were not active participants in the intraday sell-off; rather, they remained on the sidelines until stocks started rallying into the close. Based purely on the underlying volume pattern in yesterday’s market, the bulls clearly had the upper hand, despite the wild intraday price action.

After hours, the financial media was attributing the late-day rally to sudden news that the Obama administration is working on a plan to rescue individual homeowners facing foreclosure. While the news may have been a factor, obvious breaks of major price support levels in several of the main stock market indexes made the bullish reversal all the more powerful. To begin with, take a look at the daily chart of the Dow below:

On numerous occasions over the past week, we’ve talked about the importance of the Dow holding support of its recent lows, as a break of those lows would quickly send the index back to test its November 2008 lows. Surely, all traders eyes were focused on that intraday break of support, which prompted them to start dumping long positions and/or initiating new short sales. But when the late-day rally started to take hold, those very same traders were forced to quickly cover their short positions and/or buy back into their previous long positions, thereby causing the bullish momentum to feed on itself. The broad-based S&P 500 Index also experienced a similar intraday break of support, shown on the daily chart below:

Similar to the Dow’s intraday breakdown below recent consolidation, the S&P 500 broke key technical support of its multi-month uptrend line yesterday afternoon, shaking out the bulls and attracting the bears. But the index reversed to close back above that important trendline. Circled in pink on the charts above, notice both the S&P and Dow formed bullish “hammer” candlesticks yesterday, after running stops below key support levels. This pattern is bullish and positions the indexes for further gains in the near-term.

Because it had been showing relative strength within the broad market, the Nasdaq remained above its trendline support, even at yesterday’s lowest level. Still, it dipped well below its 50-day moving average, as well as the previous day’s low. The Nasdaq Composite finished the day back above its 50-day MA, and remains the only index trading above that important indicator of overall trend bias.

It’s a bit unsettling that recent moves in the market have been news-driven. Yet, we’ve learned from years of experience that news events typically only provide a good excuse for the market’s behavior at pivotal levels of support or resistance. Significant bottoms in the market can only be formed after the last of the diehard bulls have finally given up hope and “thrown in the towel.” In this regard, yesterday afternoon’s large decline and break of support in the S&P and Dow was positive, as the selling eliminated overhead supply the market would otherwise need to contend with before moving higher. We’re certainly not “out of the woods” yet, but yesterday’s violent shakeout and massive bullish reversal was certainly encouraging for the short to intermediate-term trend of the market, regardless of whether or not it was news-driven.

NOTE: The U.S. equities markets will be closed this Monday, February 16, in honor of President’s Day holiday. As such, The Wagner Daily will not be published that day, but regular publication will resume on Tuesday, February 17. Enjoy the long weekend!

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Today’s Watchlist:

There are no new setups in the pre-market today. As always, we’ll send an Intraday Trade Alert if we spot anything we decide to enter today.

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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 total — 350 from Jan. 15 entry, 100 from Jan. 23 entry) –

bought 16.20 (avg.), stop 18.29, target 21.70, unrealized points = + 4.86, unrealized P/L = + $2,187

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

bought 31.40, stop 32.78, no target (will trail stop), unrealized points = + 5.08, unrealized P/L = + $762

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

bought 72.12, stop 68.52, target 78.80, unrealized points = + 1.83, unrealized P/L = + $275

EWZ long (200 shares from Feb. 12 entry) –

bought 37.48, stop 34.68, target 47.28, unrealized points = + 1.03, unrealized P/L = + $206

INP long (200 shares from Feb. 9 entry) –

bought 31.30, stop 28.18, no target (will trail stop), unrealized points = (0.55), unrealized P/L = ($110)

Closed positions (since last report):

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

bought 23.42 (avg.), sold 23.88, points = + 0.46, net P/L = + $88

DXD long (150 shares from Feb. 12 entry) –

bought 65.37, sold 64.48, points = (0.89), net P/L = ($134)

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

$39,894

Notes:

• Per Intraday Trade Alert, we made a judgment call to scratch UGA, due to lack of follow-through on the breakout attempt.
• Per Intraday Trade Alert, we bought EWZ yesterday morning, based on relative strength and a pullback to its 20-day EMA.
• Per Intraday Trade Alert, we bought DXD when the Dow broke support in the afternoon, but promptly were forced to cover the position for a small loss. Fortunately we did, as DXD dropped another two points after we sold. Sure had to be nimble yesterday!
• 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.
• 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.

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Edited by Deron Wagner,
MTG Founder and
Head Trader