Commentary:

Stocks got off to a rough start to begin the fourth quarter, logging heavy losses across the board. There would be no repeat of Wednesday’s session, where broad market averages reversed sharply to the upside after a steep morning selloff. The selling pressure was persistent all session long, confirmed by ugly internals and strong volume. All major indices sold off in to the close and finished at the lows of the day. The small-cap Russell 2000 fell 3.4%. The Nasdaq Composite and S&P Midcap 400 each lost 3.1%. The S&P 500 and Dow Jones Industrial Average sank 2.5% and 2.1% respectively.

Turnover was mixed yesterday. Nasdaq volume checked in at 3% higher, but the 2% decline in volume on the NYSE prevented it from suffering a fifth day of distribution. When a major average hits the five or six day count on distribution days, the odds begin to favor a significant correction. As it stands now, we are simply in pullback mode, with the expectation of the bullish trend to resume once this pullback runs its course.

The Semiconductor HOLDRs ETF (SMH) broke down below the 50-day MA on heavy volume after failing to breakout from a tight, five-week base. Weakness in this sector will act as a drag on the tech heavy Nasdaq Composite. We see support from a prior low around 24.00. If this level does not hold then we could see a pullback to test the low of the 7/15 gap up.

Per Thursday’s Intraday Trade Alert, we established a short position in the Market Vectors Agribusiness ETF (MOO), shown on the chart below:

MOO showed relative weakness last week by breaking support of the August highs ahead of the S&P 500. While the S&P 500 attempted to bounce higher on 9/28 and 9/29, MOO remained in a very tight range, sandwiched between the 20-day and 50-day MA’s. We entered below the 50-day MA and the 9/25 low.

On Wednesday we scratched our buy entry in TAN off support of the 20-day EMA due to the weak price action on the opening gap up.

We cut the position right away so there was no damage done. Let’s see whether or not Thursday’s breakdown below the 50-day MA was just a washout bar or the beginning of a bigger move down to the 200-day MA. A breakout above the downtrend line next week is a potential buy signal.

With the S&P 500 clearly breaking through support of the August highs and the 20-day EMA, the short-term trend is reversing. We expect a pullback to or undercut of the 50-day MA within the next few days. Short-term swing traders should avoid entering new long positions until the market settles down. The intermediate-term trend is still up, so now would be a good time to create a watchlist of bullish ETF patterns that are coming in to logical areas of support.

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Today’s Watchlist:

PowerShares Agriculture (DBA)
Long

Shares = 400
Trigger = $25.67 (above the two-day high)
Stop = $24.15 (below the Sept. 24 “swing low”)
Target = $28.80 (test of the June 1 high)
Dividend Date = n/a

Notes = See commentary above for explanation of the setup. Traders with smaller accounts may consider trading DAG instead of DBA. A similar trigger price in DAG would be around $9.60, while a corresponding stop would be around $8.47. Note that only the performance of DBA, our “official” setup, will be monitored and tracked.

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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.

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Notes:

• Per Intraday Trade Alert, we established a short position in MOO at 37.92.
• The DBA setup did not trigger, but remains on our watchlist with the same parameters

• 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.
• 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.

Edited by Deron Wagner,
MTG Founder and
Head Trader