The Wagner Daily


Bullish momentum from the market’s latest rally enabled stocks to score another round of gains yesterday, but the test of several important resistance levels held the broad-based advance in check. The major indices gapped higher on the open, climbed further during the first hour of trading, then rolled over to new lows of the day. However, stocks found support just above the previous day’s closing prices, then drifted sideways throughout the rest of the day. The S&P 500, up 1.1% at its intraday high, finished with a 0.5% gain. The Nasdaq Composite and Dow Jones Industrial Average rose 0.7% and 0.4% respectively. The small-cap Russell 2000 climbed 1.0% and the S&P Midcap 400 increased 0.8%. The main stock market indexes settled at, or just below, the middle of their intraday ranges.

Not surprisingly, turnover remained quiet again. Total volume in the NYSE was 3% lighter than the previous day’s level, while volume in the Nasdaq declined 7%. The Veterans Day holiday likely had a hand in the slow pace of trading. Still, the Nasdaq registered its seventh straight day of lighter than average turnover. Curiously lethargic volume levels have been the modus operandi of the stock market’s current rally off the November 2 lows.

Yesterday, the benchmark S&P 500 Index briefly probed to a new 52-week high, but swiftly reversed after exceeding last month’s “swing high” by just four points. The “overcut” above the obvious level of resistance had the effect of running stops, causing short sellers to close their positions, and attracting traders who bought the breakout to a new high. It also caused the S&P to form a bearish “shooting star” candlestick on its daily chart. The “overcut” above the prior high, as well as the “shooting star” is highlighted on the chart below:

A “shooting star” candlestick often precedes a significant market reversal, especially when it forms after a “stop run” above a key level of resistance. However, the pattern needs to be confirmed the following day. Typically, the best confirmation comes in the form of an opening gap down, as it traps the bulls who bought the breakout, while attracting re-entries into shorts by the traders who just closed their positions the previous day. So far, in today’s pre-market session, the S&P futures are indicating an opening gap below yesterday’s low. It would be a negative signal if that pre-market weakness persists into the open.

The small-cap Russell 2000 Index bumped into resistance of its 50-day moving average yesterday, kissing that pivotal indicator of intermediate-term trend for the first time since breaking down below it in late October. This is shown on the daily chart of the iShares Russell 2000 (IWM), a popular ETF proxy for the Russell 2000 Index (the teal line is the 50-day MA):

Because small-cap stocks are generally considered to be “aggressive growth” companies, the Russell 2000 usually leads the market during broad market rallies. Conversely, the laggard behavior of the Russell back in mid-October, when the index failed to overcome its September high, was one factor that led to the stock market’s correction later that month. If the broad market enters into a short-term correction from here, IWM may now be a relatively low-risk way to play the short side of the market in the near-term. Buying the inversely correlated UltraShort Russell 2000 ProShares (TWM) is another possibility. However, we would NOT short the Russell unless the index at least breaks below yesterday’s low, putting it back below its 20-day exponential moving average as well.

The financial sector, another drag on the stock market during its recent correction, is also approaching key resistance levels, and should be monitored as a market indicator over the next few days. Bank of America (BAC), one of the weakest banking stocks over the past month, bumped into its 50-day MA yesterday, and must contend with a ton of overhead supply. There are others with similar patterns, as well as associated ETFs. The combination of the S&P forming a “shooting star” at resistance of its 52-week high, the Russell 2000 simultaneously running into its 50-day MA, and the financial stocks coming into pivotal resistance levels may have interesting implications for the short-term trend of the market. Nevertheless, given the stock market’s uncanny ability to seemingly move higher under any circumstances lately, we certainly won’t go so far as to say the market is forming any kind of top. Still, we can’t flatly ignore legitimate warning signs. As such, caution on the long side is highly advisable, including reduced position size and tight stops.

Today’s Watchlist:

There are no new setups in the pre-market. If any new trades are entered today, we will promptly send an Intraday Trade Alert with details.

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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  • Our IYR long setup triggered for entry yesterday, but we sent an alert to scratch the trade shortly thereafter. We also took small risk on QID, when the market failed the morning gap up, but scratched it intraday due to lack of follow-through. Though we normally don’t focus on intraday micromanagement of positions like this, we believe this is the safer method right now, as the market tests pivotal resistance levels.

  • 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