Commentary:

Bouncing off support of their 20-day exponential moving averages, the major indices reversed early losses to finish sharply higher yesterday. Stocks opened moderately lower, quickly rallied into positive territory, chopped around in the afternoon, then climbed to finish at their intraday highs in the final minutes of trade. The Nasdaq Composite jumped 2.2%, the S&P 500 2.1%, and the Dow Jones Industrial Average 1.6%. Small and mid-cap stocks, the biggest losers in Monday’s session, were the biggest gainers. The Russell 2000 and S&P Midcap 400 indices advanced 3.9% and 3.1% respectively.

Yesterday’s rebound from the previous day’s sell-off was encouraging, but lower volume across the board tells us institutions were not very anxious to jump back in the markets. Total volume in the NYSE eased 5%, while volume in the Nasdaq declined 15% below the previous day’s level. Although higher volume would have been more bullish, market internals were still pretty good. In the NYSE, advancing volume beat declining volume by an impressive margin of 6 to 1. The Nasdaq adv/dec volume ratio was positive by 4 to 1.

In yesterday’s commentary, we pointed out an ETF setup (FXP long) for traders interested in taking advantage of short-term downward momentum in the broad market. In addition, we also like the relative weakness displayed by the biotech sector, which has lagged the gains of the broad market in recent weeks. Since the sector showed relative weakness while the overall market was rallying, it’s not shocking the industry quickly turned lower at the first sign of the stock market’s pullback on Monday. As a proxy of weakness in the biotech sector, check out the daily chart of iShares Nasdaq Biotech (IBB):

The blue horizontal line on the chart above marks a significant level of price support IBB is testing. On April 20, IBB closed just below that level, then bounced slightly in yesterday’s session. If looking for a quick short setup to take advantage of any further weakness in the market, IBB may be a nice short entry below the April 20 low (below the $63 area).

After Monday’s average decline of 4.6% in the major indices, one logically could have expected a bounce in yesterday’s session. However, we were admittedly a bit surprised by the strength of the bounce. Although yesterday’s session was not as strong as the previous day’s session was weak, the main stock market indexes still rallied 2.6% on average (a retracement of just over half of Monday’s losses). But even though the stock market remains resilient, odds still favor a significant correction from the recent highs, albeit a potentially volatile one. Only a rally above the April 17 highs in the main stock market indexes would invalidate our expectation of further downside in the short-term.

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Today’s Watchlist:

There are no new setups in the pre-market today. If we enter anything new, we’ll promptly send an Intraday Trade Alert.

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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):
OIH long (100 shares from April 14 entry) – bought 83.85, stop 80.80, target 102.40, unrealized points = + 3.71, unrealized P/L = + $371

FXP long (400 shares from April 20 entry) – bought 20.75, stop 19.28, target 27.90, unrealized points = (0.70), unrealized P/L = ($280)

Closed positions (since last report):

(none)

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

$16,776

Notes:

• No changes to the open positions above.
• 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