Commentary:

Stocks wrapped up the first quarter of 2009 with a solid session of gains, enabling the main stock market indexes to reclaim their 50-day moving averages. The broad market gapped higher on the open, then trended higher in the afternoon, but selling pressure in the final thirty minutes of trading caused stocks to surrender a large portion of the day’s gains. The Nasdaq Composite advanced 1.8%, the S&P 500 1.3%, and the Dow Jones Industrial Average 1.2%. The small-cap Russell 2000 and S&P Midcap 400 indices posted identical gains of 1.6%. All the major indices closed just above the middle of their intraday ranges.

Turnover rose across the board, enabling both the S&P and Nasdaq to register a bullish “accumulation day.” Total volume in the NYSE ticked 9% higher, while volume in the Nasdaq increased 6% above the previous day’s level. Considering the S&P sold off on higher volume on Monday, it was bullish that the index followed up with a session of even higher volume gains. Nevertheless, we remain on the lookout for the presence of additional “distribution days” that could put the current rally in danger.

In yesterday morning’s commentary, we said it would be important to see whether or not the S&P and Dow were able to quickly snap back above their 50-day moving averages, as well as their previous day’s highs. Both indices indeed moved back above their 50-day moving averages, but failed to finish above their previous day’s highs. The Nasdaq marginally closed above Monday’s high, but the late-day selloff caused the index to form a bearish “inverted hammer” candlestick on the daily chart.

In the short-term, we’re now seeing mixed signals in the broad market. Leading individual stocks have generally performed better than the broad market over the past two days, which is bullish. It’s also positive that the S&P and Dow snapped back above their 50-day moving averages, after testing that new support level in the preceding day. Conversely, the bearish argument is that stocks now must contend with a plethora of overhead supply from the mid-January to mid-February levels. There also remains a clear lack of sector leadership. Overall, we believe these mixed signals are pointing to the likelihood of a period of sideways consolidation over the next one to three weeks.

Though a period of sideways consolidation typically presents limited trade opportunities, it would actually be beneficial for the intermediate to long-term health of the broad market. Because stocks ripped off their March lows so rapidly, a multi-week period of range-bound trading (aka “correction by time”) would allow the 20 and 50-day moving averages to rise up closer to meeting the prices of stocks that just made huge runs off their lows. If stocks subsequently go on to make another leg up, those bases of consolidation would decrease the odds of the breakouts failing, thereby creating greater opportunities for profit several weeks out.

If the major indices settle into a sideways range for a few weeks, it will create new ETF buy setups that would otherwise not have been that solid. This is because markets that rise too fast have a tendency to reverse lower just as quickly. As such, we’re actually pleased about the possibility of stocks catching their collective breath, as fresh buying opportunities should emerge. So far, one such ETF we’re adding to our watchlist for potential breakout in the near-term is iShares Medical Devices (IHI):

Since recovering off its March low, IHI has been drifting higher for the past two weeks, holding support of its 20-day exponential moving average (the beige line). Last week, it broke out above resistance of a six-month downtrend line. Then, a few days ago, IHI ran into resistance of its 50-day MA (the teal line), and was unable to break out above it on the first attempt. But with the trading range tightening up, and the 20-day EMA rising up to meet the price of the 50-day MA, we think IHI has strong potential for an upside breakout within the next week, thereby potentially leading the major indices on another leg higher. Our projected buy entry into IHI is just above the March 27 high of $37.68, which also correlates to a confirmed breakout above the 50-day MA. Stay tuned throughout the rest of the week, as we will analyze additional ETF setups as they present themselves.

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Today’s Watchlist:

There are no new ETF setups in the pre-market. We have a few ETFs on our watchlist for potential entry in the near-term, but let’s let’s see how the market’s consolidation develops in the coming days, focusing instead on managing our current open positions. If any ETFs on our watchlist meet our criteria for buy entry, we’ll promptly send an Intraday Trade Alert with details.

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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):
UGA long (175 shares from March 4 entry) – bought 23.41, stop 20.49, target 31.30, unrealized points = + 0.48, unrealized P/L = + $84

USO long (150 shares from March 17 entry) – bought 29.08, stop 25.18, target 38.70, unrealized points = (0.03), unrealized P/L = ($5)

TAN long (500 shares from March 31 entry) – bought 7.05, stop 5.88, target 9.75, unrealized points = (0.11), unrealized P/L = ($55)

HHH long (200 shares from March 23 entry) – bought 35.25, stop 32.49, target 41.80, unrealized points = (0.54), unrealized P/L = ($108)

SLV long (400 shares from March 5 entry) – bought 13.14, stop 12.25, target 16.35, unrealized points = (0.35), unrealized P/L = ($140)

UDN long (700 shares from March 25 entry) – bought 25.70, stop 24.84, target 27.45, unrealized points = (0.50), unrealized P/L = ($350)

Closed positions (since last report):

(none)

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

$41,706

Notes:

• TAN triggered for buy entry, as per the details in yesterday’s Wagner Daily. No changes to other open positions.
• 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