The Wagner Daily | February 18, 2009

Commentary:

Slicing through key support levels of their intermediate-term uptrends, stocks technically fell back into correction mode yesterday. After opening several percent lower, the major indices oscillated in a tight, sideways range throughout the rest of the day. The Dow Jones Industrial Average tumbled 3.8%, the Nasdaq Composite 4.2%, and the S&P 500 4.6%. The small-cap Russell 2000 plunged 4.3%, while the S&P Midcap 400 similarly shed 4.2%. Thirty minutes before the closing bell, a brief rally attempt pushed the broad market back to its morning highs, but another wave of selling into the close caused the main stock market indexes to settle at their intraday lows.

Turnover swelled across the board, as institutional selling picked up steam. Total volume in the NYSE rose 29% above the previous day’s level. Volume in the Nasdaq ticked 18% higher. Trading in both exchanges was well above average levels, indicating substantial selling amongst mutual funds, hedge funds, and other institutions. Declining volume in the NYSE trounced advancing volume by a margin of 20 to 1. Market internals were significantly better in the Nasdaq, where declining volume beat advancing volume by 4 to 1.

Despite the bloodletting in yesterday’s session, investors in gold and silver ETFs had something to smile about. Bucking the broad-based weakness, SPDR Gold Trust (GLD) gained 3.1% yesterday, Market Vectors Gold Miners (GDX) rose 3.7%, and iShares Silver Trust motored 3.3% higher. Exceeding our original, intermediate-term price target of $21.70, the leveraged Gold Double Long (DGP) jumped 5.9%. With a holding period of just over one month, we closed the DGP trade for a net average gain of 36% (5.8 points). We also sold our GDX position into strength, netting a gain of 19% since our December 26, 2008 entry. On the daily chart of DGP below, we’ve annotated our two entry prices (pullback to the 50-day MA and breakout above Dec. 2008 highs), as well as yesterday’s exit into strength:

Although we remain bullish on the long-term trends of the gold and silver ETFs, they may be setting up for at least a short-term pullback. This assessment is based on the fact that spot gold is approaching significant resistance from its July 2008 high, and has also moved more than 10% above its 50-day moving average. A historical, multi-year look at the chart of the shiny commodity shows it has a consistent tendency to correct every time it moves more than 10% above its 50-day moving average. Nevertheless, realize corrections occur in one of two ways: corrections by price or corrections by time. The former obviously occurs in the form of a price retracement. The latter occurs when stocks or ETFs move sideways (consolidate) until moving averages, such as the 20 and 50-day, rise up to meet their prices, thereby enabling a resumption of the dominant trend. Gold will certainly remain on our radar screen for potential re-entry, but we simply opted to lock in a handsome gain, rather than sitting through a possible correction.

Until yesterday, bulls were understandably pinning their hopes on the fact that the major indices were still clinging to support of their January lows. Unfortunately, this is no longer the case. Though the Nasdaq Composite fell to “only” its lowest close of the past three weeks, both the S&P 500 and Dow Jones Industrial Average slid to their lowest closing prices since setting their six-year lows on November 20, 2008. Curiously, the Dow actually matched its November 20 closing price of 7,552. Take a look:

Clearly, all eyes were focused on that major level of psychological support in the Dow yesterday. Uncanny how that works, isn’t it? Anyway, if the Dow finishes lower by just one point or more in today’s session, it will mark a fresh six-year closing low.

The S&P 500 is still 4.9% above last November’s closing low of 752, but it too fell through pivotal support of its January consolidation. On the daily chart below, notice how the S&P has convincingly violated its intermediate-term uptrend line, putting the index back into correction mode:

Showing a bit of relative strength, the Nasdaq Composite is still holding above the lows of its January consolidation, but it followed the S&P by breaking below support of its intermediate-term uptrend line from the November 2008 low.

If there wasn’t so much market-moving news expected this week, the technical picture would give us the “all clear” sign to re-enter the short side of the market. However, President Obama is scheduled to detail plans of his homeowner mortgage rescue plan sometime today, followed by a possible announcement of further details on the Fed’s “bad bank” bailout plan tomorrow. As we learned last Tuesday, when the market tanked following the initial announcement of the latest economic stimulus plan, stocks are presently in a very news-driven environment. It’s anybody’s guess as to whether the market will have the same, or perhaps opposite, reaction to any important announcements made in the coming days.

We’ve begun scanning for ETF short selling and/or inversely correlated ETF buying opportunities, but we’re frankly in no hurry to enter new positions right now. Regardless of a realized loss in iPath India (INP), yesterday’s large gains in DGP and GDX put our model ETF account on track for a rather profitable month. With all the uncertain pending news floating around, there’s no point in entering new trades just for the thrill of it. Remember, the most profitable traders are consistently out of the market more than they’re in it. If you’re just looking for exciting action, go to Vegas. But if you’re serious about generating consistent profits over the long-term, stay on the sidelines during inconclusive times, so that you can aggressively jump back in the game when the odds of profitability are clearly in your favor.

Today’s Watchlist:

As per the commentary above, 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.

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 = + $4

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

bought 37.48, stop 34.68, target 47.28, unrealized points = (1.08), unrealized P/L = ($216)

Closed positions (since last report):

net P/L = + $2,615

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

bought 31.40, sold 37.37, points = + 5.97, net P/L = + $893

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

bought 31.30, sold 27.75, points = (3.55), net P/L = ($714)

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

$18,103

Notes:

DGP hit our original price target of $21.70 on yesterday’s open, triggering an immediate sell into strength.
Per Intraday Trade Alert, we sold GDX with a tight trailing stop that hit yesterday afternoon.
INP gapped down, prompting the use of the MTG Opening Gap Rules. The adjusted stop, 15 cents below the 20-minute low, subsequently triggered immediately thereafter.
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