Stocks built on momentum from the previous afternoon’s closing rally, enabling the main stock market indexes to snag another round of strong gains and close at their highest levels of the past six weeks. After opening firmly in positive territory, the major indices drifted sideways to higher throughout the session, eventually finishing at their best levels of day. The Nasdaq Composite jumped 3.8%, as both the S&P 500 and Dow Jones Industrial Average climbed 2.3%. The small-cap Russell 2000 and S&P Midcap 400 indices advanced 4.4% and 3.9% respectively.
Volume edged higher across the board, enabling the major indices to register a bullish “accumulation day.” Total volume in the NYSE rose 2% above the previous day’s level, while volume in the Nasdaq increased 5%. Obviously, market internals were positive in both exchanges, but there was clear bullish divergence in the Nasdaq, where advancing volume outnumbered declining volume by more than 16 to 1. The NYSE adv/dec volume ratio was positive by less than 3 to 1.
When a stock market rally is primarily led by extremely weak sectors bouncing off their lows, rather than leading sectors breaking out to new highs, the rally is usually short-lived. As such, it’s important to point out one key difference between yesterday’s rally and most other “up” days this month; yesterday’s gains were not driven by dead sectors, such as banking and insurance, that are merely bouncing off their lows. Rather, a broad range of industry indexes such as Semiconductors, Software, Retail, and Transportation all logged percentage gains greater than the main stock market indexes. The Bank Index ($BKX), on the other hand, gained just 0.5% yesterday. Overall, we view this as a possible sign that investors may slowly be becoming more comfortable with market risk by deploying funds outside of perceived “value” plays. Such a change of sentiment is necessary in order for the stock market’s rally to be sustainable. Nevertheless, the Nasdaq Composite is now approaching a major level of price resistance that could trigger a pullback or short-term price consolidation. This is shown on the daily chart below:
The dashed horizontal line on the chart above marks resistance of the Nasdaq’s prior significant high from last month, which also acted as resistance throughout December and January. Because the Nasdaq has shown relative strength over the past several weeks, it is the only one of the major indices that has already reached resistance of its February highs. Since the Nasdaq has shown leadership on the way up, a pullback triggered by bumping into its February highs could similarly cause the S&P and Dow to retrace a greater percentage of their recent gains than the Nasdaq.
Though the broad market remains in both short and intermediate-term uptrends, resistance of the Nasdaq’s February highs means it may be a good idea to consider just one or two short positions (or inverse ETFs) near current levels, especially if you’re now heavily positioned on the long side of the market. Trailing tight stops on winning long positions isn’t a bad idea either. One bearish setup we’re monitoring for potential entry is the inversely correlated UltraShort Financials ProShares (SKF). The hourly chart appears below:
As explained on the chart above, we’re planning to buy SKF if, and only if, it breaks out above resistance of its multi-week downtrend line, which neatly converges with resistance of the 20-period exponential moving average on the hourly chart (regular subscribers should note our specific trigger, stop, and target prices below). Ideally, such a breakout would occur as the Nasdaq retraces at resistance of its February high, causing the S&P and Dow to lead the way lower to the downside. Since financials showed relative weakness by failing to participate in yesterday’s rally, the sector could be one of the first to fall if the broad market shows any weakness, or even mere consolidation, over the next week.
If you plan to trade this setup, there are a few things to be aware of. First is the importance of not “jumping the gun” with a premature entry before SKF breaks out. Since SKF is consolidating at its lows, there’s nothing to prevent it from making another leg lower right now. However, if SKF breaks out above its downtrend line, short-term momentum should reverse. The second point is to remember the UltraShort sector ETFs are only effective for very quick, momentum-based trading, which is all we’re planning to do with the SKF (read more about this in our Feb. 6 commentary). Finally, be aware that SKF is an extremely volatile ETF. As such, be sure to decrease share size accordingly, in order to account for the wider than usual stop that is necessary when trading SKF.
UltraShort Financials ProShares (SKF)
Shares = 60
Trigger = 97.34 (above the 20-EMA/60 min. and yesterday’s high)
Stop = 86.78 (below the four-day low)
Target = 129.80 (just shy of Feb. 20 high)
Dividend Date = n/a
Notes = See commentary above for explanation of the setup. Also, note this is intended to be a very short-term, momentum-based trade. Anticipated holding period is just 2 to 4 days. Traders not comfortable with such short timeframes may not wish to participate in this trade (assuming it triggers for entry).
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):
- No changes to open positions today, though we still plan to trail stops higher on USO, UGA, and SLV after they breakout above their short-term consolidations.
- 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 [email protected] if not already set up for this value-added feature we provide to subscribers.
UGA long (175 shares from March 4 entry) – bought 23.41, stop 20.49, target 31.30, unrealized points = + 2.8, unrealized P/L = + $490
USO long (150 shares from March 17 entry) – bought 29.08, stop 25.18, target 38.70, unrealized points = + 2.94, unrealized P/L = + $441
SLV long (400 shares from March 5 entry) – bought 13.14, stop 11.69, target 16.35, unrealized points = + 0.21, unrealized P/L = + $84
HHH long (200 shares from March 23 entry) – bought 35.25, stop 32.49, target 41.80, unrealized points = + 0.4, unrealized P/L = + $80
UDN long (700 shares from March 25 entry) – bought 25.70, stop 24.84, target 27.45, unrealized points = (0.15), unrealized P/L = ($85)
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
Edited by Deron Wagner,
MTG Founder and