The Wagner Daily


After jumping higher out of the starting gate, the S&P 500 briefly moved above the upper channel resistance of its sideways range that has been intact for the past three weeks, but the breakout attempt failed, causing stocks to drift right back down. By mid-day, most of the major indices had fallen into slightly negative territory, but the broad market stabilized and oscillated in a tight, horizontal range throughout the rest of the day. Tech stocks showed a bit of relative strength, enabling the Nasdaq Composite to finish 0.4% higher. The S&P 500 was unchanged and the Dow Jones Industrial Average slipped 0.2%. Small-caps showed bullish divergence for a second straight day, helping the Russell 2000 Index to gain 1.2%. The S&P Midcap 400 advanced 0.7%. The major indices settled around the bottom third of their intraday ranges.

Total volume in the NYSE was 9% lighter than the previous day’s level, while volume in the Nasdaq eased 3%. The slower turnover in both exchanges prevented the Nasdaq from registering a bullish “accumulation day,” and also held volume in the index below its 50-day average level. In the Nasdaq, advancing volume exceeded declining volume by a margin of 2 to 1. The adv/dec volume ratio in the NYSE was positive by 3 to 2, despite a flat close in the S&P, and slightly negative finish in the Dow.

In our November 30 commentary, we illustrated how the previous day’s large losses in the stock market (sparked by the now-forgotten Dubai World news) coincided with the CBOE Volatility Index ($VIX) coming into key support around the 20 level. We also suggested that whenever the $VIX next approached that level, it would be another warning sign to be extra cautious on the long side of the market. Now, just three days later, the “fear index,” as the $VIX is affectionately called, has already drifted back down to approach support of its recent lows. As merely a confirming indicator, this certainly does not imply the market will now make a big move lower, but it does suggest the market is again showing low levels of fear and high levels of complacency. . .the perfect recipe for a correction that catches people off guard:

On November 19, we discussed how the DJ Transportation Average ($DJT), a key component of Dow Theory confirmation, was at a technical “make it or break it” level that would soon have a significant impact on the direction of the major indices. After drifting lower for less than two weeks, the transports have risen back up to test a pivotal resistance level that has acted like a brick wall for the sector in recent months. The chart of iShares DJ Transportation Average (IYT), a popular ETF proxy of the $DJT, is shown below (click here to review our initial assessment of IYT, from our November 19 commentary):

In yesterday’s Wagner Daily, we said of the S&P 500’s recent price action, “Because of the trading range condition, we must now be prepared for the possibility of a few down days that take the index down towards lower channel support, at the 1,083 area. Of course, a convincing gap above the high of the range, on today’s open, could quickly make history of the recent range-bound channel.” After the market opened, the S&P 500 indeed moved above the high of its recent range, but failed to convincingly do so, stalling shortly thereafter. This is shown on the hourly chart of the S&P 500:

Circled in pink, notice the S&P popped its head above resistance of the 1,113 level by just 2 points, stayed above that resistance for just one hour, then fell back into its prior range. This is what is commonly referred to as a “stop run,” as many traders set their buy stops to enter new positions, as well as cover shorts, just above obvious levels of price resistance. While buying breakouts can be a very profitable strategy, yesterday’s action in the S&P 500 was a good reminder of two things: the benefit of setting stops with enough “wiggle room” beyond clearly-defined areas of support/resistance and the importance of quickly exiting a position that fails to hold above its breakout on the same day as entry. Given the trading-range pattern of the S&P 500 over the past several weeks, it would not surprise us to see the index now drift back down to support of the 1,083 area. However, a closing price above yesterday’s high, in today’s session, would be rather bullish.

Yesterday, iShares Nasdaq Biotech (IBB), which we bought on December 1, confirmed the breakout above its five-month downtrend line by rallying to close above resistance of its mid-November “swing high.” Biotechs have begun showing relative strength over the past several days, indicative of the sector rotation we recently suggested. The Semiconductor HOLDR (SMH) tested the key line of horizontal price resistance discussed in yesterday’s newsletter, but failed to close above it. We’ll continue watching the performance of the semis for a potential buy entry into SMH. The iShares Japan Index Fund (EWJ) consolidated with an “inside day” yesterday, and we’re still monitoring it for potential buy entry on a pullback. The short setup in Oil Service HOLDR (OIH), as per yesterday’s analysis, triggered for entry after the ETF fell below its December 1 low.

Today’s Watchlist:

There are no new setups in the pre-market today. If we enter anything new, 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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  • The OIH setup listed in yesterday’s Wagner Daily triggered for short entry. As with all our recent positions, initial risk is limited to approx. $300, about half our typical risk per trade.
  • After yesterday’s close, Bank of America (BAC) announced they will be repaying the full $45 billion TARP loan from the government. The news obviously had a positive effect on financial stocks, and may put pressure on the RKH short position today. Financials were showing relative weakness, and RKH was poised to roll over again, but news such as this could spark buying interest in the sector again. We’ll monitor price action closely, and will send an Intraday Trade Alert if we decide to close the position early, ahead of its original stop. There is always the possibility financials bounce on the open, then traders sell into strength of the gap. That’s why we’ll first observe price action, rather than making any snap decisions.
  • 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