The Wagner Daily


Stocks launched the holiday-shortened week with a round of solid gains across the board yesterday, but a complete lack of intraday momentum dominated the session. The broad market jumped higher out of the starting gate, then moved higher in the first thirty minutes of trading, but the major indices drifted lower throughout the rest of the day. The S&P 500 and Nasdaq Composite scored identical gains of 1.4%, as the Dow Jones Industrial Average climbed 1.3%. Small-caps showed a bit of relative strength, enabling the Russell 2000 to advance 1.7%. The S&P Midcap 400 Index rose 1.1%. All the main stock market indexes closed in the bottom third of their intraday ranges, indicating a lack of buying interest into the close.

The absence of follow-through strength after the initial opening gap could be attributed to the lack of strong volume. Total volume in the NYSE was 14% lower than the previous day’s level, while volume in the Nasdaq eased 10%. Despite the stock market’s substantial gains, the light turnover was not shocking. The trend of lighter volume on the “up” days has been the case for the past several weeks. Though the pattern of continually lighter volume gains and higher volume losses is nearly always a cautionary sign to the bulls, the major indices uncannily continue to climb higher regardless. As we approach Thursday’s Thanksgiving holiday, the pace of trading could remain lethargic. Still, market internals were bullish. In the NYSE, advancing volume exceeded declining volume by a margin of 9 to 2. The Nasdaq adv/dec volume ratio was positive by nearly 3 to 1.

In our November 19 commentary, we pointed out the chart of iShares Nasdaq Biotech Index (IBB) as being at a pivotal “make it or break it” level of resistance. In the days that followed, IBB “undercut” the lows of its near-term trading range, but held support of its 20-day exponential moving average. Upon analyzing the price and volume action of various individual stocks in the biotech industry, it appears the sector may now be forming a base that enables IBB to “make it,” rather than “break it.” On the daily chart of IBB below, notice how its two-month downtrend line nearly converges with the 50-day moving average. A convincing rally above yesterday’s high could lead to a breakout above both resistance levels, thereby triggering a tradeable swing trade buy entry:

The S&P Healthcare SPDR (XLV), a related, but more diversified ETF, has been showing much more relative strength than IBB. Closing at a fresh, 52-week high yesterday, XLV is on our watchlist for potential buy entry on a pullback to support. Specifically, we like the setup for buying XLV on a retracement to near its 20-day exponential moving average, which is just above the price of its recent breakout level. The possible pullback buy entry is illustrated on the following daily chart:

Between IBB and XLV, the latter has obviously been showing more strength; XLV is at a new high, while IBB has been in pullback mode. However, the reward-risk ratio of buying XLV at its current price is not very attractive. IBB, on the other hand, may be starting to show early signs of stealth institutional buying that sends it higher in the near-term. This notion would be confirmed if IBB breaks out above its two-month downtrend line and 50-day MA while the broad market remains in a trading range. Waiting for that confirmation before buying IBB is crucial. Jumping the gun through prematurely buying trend reversal setups is not a good idea.

While on the subject of healthcare-related ETFs, take a look at the daily chart of iShares Medical Devices (IHI):

The dashed horizontal line on the chart above shows that IHI is now consolidating at resistance of its prior highs from September. If IHI rallies above the $51.50 area and holds, it could lead to another leg higher in the short-term. However, be aware that IHI only trades an average daily volume of 50,000 shares. Because ETFs are synthetic instruments that automatically follow the price of an underlying portfolio of stocks, the average daily volume levels are not a major concern. But you should still be aware of potentially bad order fills with such light-volume ETFs, as the bid-ask spreads are sometimes a bit wider. This is mainly a concern only for traders with sizeable amounts of trading capital.

Yesterday, the S&P 500 blissfully succeeded at invalidating yet another “head and shoulders” pattern, this time on the hourly chart interval. Although we illustrated the development of the head and shoulders in yesterday’s Wagner Daily, we were quick to point out that other occurrences of this bearish pattern in recent months have failed to follow through to the downside. This, of course, does not mean the major indices could not easily slip back to last week’s lows, especially since the current environment feels like a sideways trading range is being established. But even if the S&P fills yesterday’s upside gap, the (now failed) head and shoulders pattern will not really be a major issue in the near-term outcome.

Overall, we believe the current environment is most ideal for new trades with a very short holding time of one or two days. New “swing trade” setups of a longer time frame may be best entered on the market’s next pullback. The exception may be with ETFs that have been out of sync with the recent direction of the stock market, and are just now starting to show signs of potentially moving higher. IBB is one such candidate, but only on a convincing rally above yesterday’s high.

Holiday publication schedule: This Thursday, November 26, the U.S. equities markets will be closed for the Thanksgiving holiday. As such, The Wagner Daily will not be published that day. The following day, the stock market is open, but will close at 1:00 pm ET. That day, we will be publishing an abbreviated version of The Wagner Daily that mainly provides any necessary updates and notes on open positions for the day. Regular publication will resume on Monday, November 30. Enjoy the time away from the markets with your friends and family.

Today’s Watchlist:

There are no new setups in the pre-market today. ETFs on our watchlist include: IBB, EWY, PGJ, and XHB (breakouts) and XLV, PPH (pullbacks). However, we may wait until the passing of the holiday to enter new positions, in order to avoid dealing with the potentially risky light-volume environment. If we do take a shot at any new positions, it will be done with reduced share size (50% or so), and we’ll play the stop tight on the first day of entry (as we did with XHB yesterday). If we enter any new positions, we’ll 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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  • Per Intraday Trade Alert, we bought the S&P Homebuilders SPDR (XHB) when it rallied back above its 50-day MA yesterday morning. We liked the recent bullish consolidation, and last week’s “undercut” of support made it more likely to zoom higher on the first return of strength. However, XHB disappointed by falling back below its 50-day MA and trending steadily lower after the initial morning surge. As such, we made a judgment call to scratch the trade, losing just 10 cents on the exit. We’ll keep monitoring it for a possible re-entry attempt, but prefer to be flat XHB for now.
  • 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