Commentary:

A choppy, indecisive session of trading left the major indices flat to modestly lower in yesterday’s session, as volume picked up across the board. After opening slightly lower, stocks quickly stabilized and attempted to reverse at mid-day, but the market was unable to gain any upside traction. The Nasdaq Composite managed to close at the unchanged mark, but the S&P 500 lost 0.3%. The Dow Jones Industrial Average slipped 0.2%. The small-cap Russell 2000 and S&P Midcap 400 indices were lower by 0.3% and 0.4% respectively. The main stock market indexes finished around the upper third of their intraday ranges.

Total volume in the NYSE increased 21%, while volume in the Nasdaq was 13% greater than the previous day’s level. The S&P 500’s loss on higher volume caused the index to register a bearish “distribution day,” indicative of institutional selling. However, considering the extremely light turnover of the Columbus Day session, it didn’t take much for the pace of trading to pick up. In both exchanges, advancing volume was roughly on part with declining volume. Given the lighter than average volume levels of the market’s recent gains, stocks actually withstood the selling pretty well.

After the close of yesterday’s trading, Intel announced a surprisingly positive earnings report that sent shares of its stock roughly 5% higher in after-hours trading. The news also spiked the S&P and Nasdaq futures to the upside, and that bullish momentum is likely to carry into the opening of today’s session as well. A week ago, the Semiconductor HOLDR (SMH) was showing relative weakness to the broad market, but the ETF surged higher on October 9, after briefly “undercutting” support of its 50-day moving average. In a recent alert to subscribers, we pointed out intraday weakness in the Semiconductor HOLDR (SMH), and said daytraders only might consider a short sale. However, because we know the “undercut” in an ETF trading near its highs often precedes a surge to new highs, we cautioned that any short position in SMH should not be held overnight. Several days later, SMH had indeed recovered back to the upper end of its recent trading range. Now, given the pre-market strength in Intel, SMH is poised to gap up and breakout above the high of a lengthy base of consolidation. This is shown on the daily chart below:

One way to take advantage of gap ups to new highs is to force the ETF to confirm its morning strength by waiting for it to subsequently rise above the high of its first 20 minutes of trading (the actual basis behind the MTG Opening Gap Rules). If it does, odds are the bullish momentum will persist throughout most of the day. If, however, traders sell into strength of the upside gap, the ETF will open higher, but fail to move above its initial high. In that case, it may be best to wait on the sidelines. When entering a swing trade in an ETF that breaks out and rallies to a new high after the first 20 minutes of trading, stops can often be placed just below support of the intraday low (plus some “wiggle room”). But in case the range from the intraday low to the 20-minute high is too wide, a tighter stop below the 20-EMA on the 15-minute chart often does the trick. Strong stocks and ETFs that break out on convincing volume should not violate support of that moving average on the initial move higher.

For the past four months, crude oil futures have been stuck in a choppy, sloppy sideways range. However, the sticky stuff is once again testing upper channel resistance of that range. If it finally breaks out this time, it could lead to a very high-momentum ascent in the short-term. Typically, the longer a base of consolidation that precedes the breakout, the more powerful the eventual breakout. The daily chart of USO is shown below:

At one time, the complicated manner in which the portfolio of USO was comprised had the negative effect of causing the ETF to lag the actual performance of the actual crude oil futures contracts. This appears to have changed in recent months, as the ETF and futures contracts have been trading pretty closely in sync with one another. Over the past month, for example, the E-mini Crude Oil Continuous Contract (@QM) has gained 6.46% (through 4:00 pm ET yesterday). Comparatively, USO has gained 6.44%. The day-to-day price patterns have also been mirroring one another, so it’s good to see USO is no longer lagging the actual commodity price movements. Going into today, we’re stalking USO for potential buy entry on a powerful breakout above its range. Regular subscribers should note our detailed trigger, stop, and target prices below.

Since the beginning of the month, fixed-income (bond) ETFs have fallen out of favor. There has been a definitive rotation out of bonds, which is pressuring many of the fixed-income ETFs. One trade setup that may soon enable one to take advantage of this rotation is a possible buy entry into UltraShort 20+ year T-bond (TBT), an ETF that is inversely correlated to the price of the long-term gov’t bonds. Take a look:

On October 9, TBT gapped up to break out above its 20-day exponential moving average. Yesterday, it pulled back to new short-term support of that same level. It’s probably too early to enter TBT right now, as it has not yet confirmed its trend reversal. But notice how its primary downtrend line converges with the 50-day moving average (the teal line). If TBT rallies to close above that level, it will have technically broken its downtrend. The first pullback after such a breakout would be an ideal buy entry. As such, you may want to put TBT on your watchlist for potential buy in the coming week. As per yesterday’s commentary, we’re also stalking the following list of ETFs for pullback buy entries: RSX, EWZ, FXC, XLP, ILF, and GLD (if you’re not already long).

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Today’s Watchlist:

U.S. Oil Fund (USO)
Long

Shares = 150
Trigger = 38.91 (above horizontal price resistance)
Stop = 36.22 (below 20 and 50-day support)
Target = no specific target (will trail stop)
Dividend Date = n/a

Notes = See commentary above for explanation of the setup.

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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 raised the stop in DGP. New stop is just below short-term support of the 20-EMA/60 min. and the two-day low.

• 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