The Wagner Daily | May 21, 2009

Commentary:

After gapping higher on the open, stocks initially trended higher throughout the first hour of trading, but the bulls relinquished control shortly thereafter. Equities reversed course later in the morning, drifting back to the flat line by mid-day, then making another leg down, into negative territory, later in the afternoon. The Nasdaq Composite fell 0.4%, the S&P 500 0.5%, and the Dow Jones Industrial Average 0.6%. The small-cap Russell 2000 and S&P Midcap 400 indices lost 0.8% and 0.6% respectively. All the main stock market indexes closed near their intraday lows.

Turnover finally rose across the board, but the higher volume losses caused both the S&P 500 and Nasdaq to register a bearish “distribution day.” Mutual funds, hedge funds, and other institutions became active on the sell side, causing total volume in the NYSE to swell 26%. Volume in the Nasdaq increased 9% above the previous day’s level. In the NYSE, declining volume only marginally exceeded advancing volume, but the adv/dec volume ratio steadily deteriorated from a positive margin of more than 12 to 1 in the morning. The Nasdaq adv/dec volume ratio finished negative by 2 to 1.

In yesterday’s Wagner Daily, we illustrated that iShares Silver (SLV) was breaking out above a base of consolidation. The reason we focused on a spot silver ETF, rather than a spot gold ETF, is because silver had been exhibiting relative strength silver to gold. Silver, for example, was already trading above its March 2009 high, and nearing resistance of its February 2009 high. Laggard gold, on the other hand, was still below its March 2009 high, and well below its February 2009 high as well. But while the SPDR Gold Trust (GLD) is still below those resistance levels, even after yesterday’s 1.3% gain, Market Vectors Gold Miners (GDX) has clearly been showing relative strength to GLD. The difference is that GLD follows the price of spot gold, whereas the portfolio of GDX is comprised of a basket of individual gold mining stocks. On the daily charts below, notice GDX just broke out to close at its highest level in more than nine months, but GLD is still below its February and March 2009 highs:

The CurrencyShares Japanese Yen (FXY), which we’ve been long since April 24, rallied to close at a multi-month high yesterday. If it clears yesterday’s high of $105.09, there will be little resistance to prevent it from surging substantially higher in the near-term. We’ll continue to trail a stop below each “swing low” in order to maximize gains along the way. Below is a daily chart of FXY:

Weak stocks and sectors bouncing off their dead lows, rather than leading growth stocks, have largely been responsible for the broad market’s rally of the past several months. The financial sector, including banks, brokers, insurance, and real estate, is one such example. From its March 2009 low to May 2009 high, the S&P Financial SPDR (XLF), a popular ETF proxy of the financial sector, more than doubled (110% gain to be exact). By comparison, the S&P 500 SPDR (SPY) rallied 36.5% during the same period.

Because the current broad market rally has largely been driven by the financial sector, one might also expect the rally to fizzle out when this sector starts to show weakness and signs of resuming its long-term downtrend again. Yesterday, such bearish divergence in the financial sector was readily apparent, and likely responsible for the afternoon sell-off in the major indices as well. Though SPY lost only 0.8% yesterday, XLF tumbled 2.6%. The weakness in the financial sector also caused the inversely correlated UltraShort Financials ProShares (SKF) to jump 4.1%, breaking out above a six-week downtrend line in the process. This is shown on the 120-minute chart of SKF below:

Notice that SKF broke out above its six-week downtrend line after forming a “higher low” on its hourly chart (circled in black). This means short-term momentum is starting to reverse in this sector, though it’s obviously too early to say whether the intermediate-term bias will change as well. When SKF broke out above its downtrend line yesterday, we sent an Intraday Trade Alert to subscribers, informing them we were buying it. At the time of entry, we only intended SKF to be a daytrade, but because of how weak the sector remained in the afternoon, we made a judgment call to keep the position overnight. In today’s session, we’ll closely monitor price action in the financial sector to determine whether to lock in a quick, multi-point gain in SKF, or hold in anticipation of further short-term gains.

Yesterday, all the main stock market indexes formed bearish “shooting star” candlestick patterns by rallying well above their opening prices, but reversing to close below their opening prices. Not surprisingly, the bearish intraday reversal occurred as some of the major indices began testing resistance of their May highs from two weeks ago. The “shooting star” and resistance of the prior May highs is annotated on the daily chart of the Dow Jones Industrial Average below:

In yesterday’s commentary, we said, “overall market sentiment could very quickly revert back to favoring the bears” if the major indices break below their 20-day exponential moving averages, which had converged with their May 18 lows. While the main stock market indexes are still above their 20-day EMAs and May 18 lows, it would only take one swift day of selling in today’s session to cause a break of those key support levels. Again, we believe a closing break below the May 18 lows would likely lead to a retracement down to the 50-day moving averages, so keep an eye on those pivotal support levels in today’s session. May 18 lows for the major indices are as follows: S&P 500 – 888, Dow Jones Industrials – 8,270, Nasdaq Composite – 1,690.

Today’s Watchlist:

There are no new setups in the pre-market today, as we already have a nice, diverse mix of ETF positions, each of which is showing an unrealized gain. Nevertheless, we will send an Intraday Trade Alert if/when we enter anything new.

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 = + $981

FXY long (250 shares from April 24 entry) – bought 102.41, stop 100.80, target 112.20, unrealized points = + 2.63, unrealized P/L = + $658

TAN long (400 shares from May 13 entry) – bought 8.16, stop 9.48, target 12.88, unrealized points = + 1.56, unrealized P/L = + $624

UNG long (600 shares total – 400 from May 6, 200 from May 19 entry) –
bought 15.12 (avg.), stop 14.22, target 19.80, unrealized points = + 0.42, unrealized P/L = + $252

SKF long (150 shares from May 20 entry) – bought 43.90, stop 41.40, no target (will trail stop), unrealized points = +1.40, unrealized P/L = + $210

Closed positions (since last report):

net P/L = + $350

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

$58,957

Notes:

Per Intraday Trade Alert, we sold IEO into strength yesterday morning, locking in a 2.35 point gain.
Per Intraday Trade Alert, we bought SKF yesterday. It was initially intended to be a daytrade, but we made a judgment call to keep the position overnight, due to its substantial profit buffer, as well as major weakness in the financial sector. If we decide to exit SKF in today’s session, we’ll send an alert. Otherwise, assume we remain long.
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.

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Edited by Deron Wagner,
MTG Founder and
Head Trader