Stocks concluded the first week of 2010 with a round of solid gains, as the major indices logged another advance last Friday. Despite an initial, unenthusiastic reaction to a pre-market employment report, the ever-ready bulls showed up in the final thirty minutes of trading, reversing earlier losses into modest closing gains. Tech stocks were back in action, enabling the Nasdaq Composite to rise 0.7%. The S&P 500 and Dow Jones Industrial Average edged higher by 0.3% and 0.1% respectively. The small-cap Russell 2000 gained 0.4% and the S&P Midcap 400 climbed 0.6%. All the main stock market indexes finished at their highs of the day and week.
Volume eased across the board, indicating last Friday’s gains lacked the backing of institutional support. Total volume in the NYSE receded 17%, while volume in the Nasdaq was 5% lighter than the previous day’s level. Turnover in the NYSE also fell back below average levels. Nevertheless, it was the first week in five weeks that the S&P and Nasdaq registered higher volume gains.
The iShares Real Estate Index (IYR), an ETF that showed relative strength throughout most of December, pulled back to short-term support of its 20-day exponential moving average (EMA) last week. This has created a potential “swing trade” opportunity on the long side. On the daily chart below, notice IYR probed below its 20-day EMA on an intraday basis, several days last week, but managed to close above that level of short-term support each time:
On the shorter-term hourly chart interval, a downtrend line has developed from the December 28 high, which is anchored with the high of January 7. As such, a breakout above that downtrend line, which is just above last Friday’s high, would be a valid buy entry for the current pullback. However, it may be advisable to look for a little more price confirmation by first waiting for IYR to move above its January 7 high ($46.52), rather than only the January 8 high ($46.23). Furthermore, if IYR gaps up, it may be wise to keep a very tight stop, just below the low of the first 20 minutes, in order to guard against a fakeout move. If IYR is going to resume its uptrend from here, the healthiest action would be an opening gap higher that doesn’t look back.
In our January 8 commentary, we said, “Overall, the uptrend clearly continues to favor the bulls, and there’s simply no reason to fight it. Still, most of the strongest ETFs have become a bit extended, and need to pull back to near-term support levels in order to present attractive reward-risk ratios for new long entry.” Going into today, this continues to be our overall thoughts; for example, we’re now focused primarily on buying strong ETFs that pull back (such as IYR).
Valuable experience over the past ten years has taught us the dangers of getting caught up in the frenzy and chasing new entries on runaway breakouts in stocks and ETFs. Still, because an “overbought” market can continue to become even more “overbought” before it eventually corrects, traders with existing long positions that are performing well should simply consider the use of trailing stops to maximize gains, rather than trying to pick a top. We used a rather tight trailing stop to lock in a small gain on our SMH position last week, but only because the sector had started to show relative weakness. But since the energy sector is still demonstrating clear relative strength, we’re giving the XLE stop a little more “wiggle room” for now, in order to let the winner run.
PowerShares U.S. Dollar Bull Index (UUP)
Shares = 1,300
Trigger = 22.75 LIMIT (“undercut” of 20-day EMA support on the pullback)
Stop = 22.38 (below the 50-day MA)
Target = 24.95 (61.8% Fibonacci retracement from the March 2009 high to December 2009 low)
Dividend Date = n/a
Notes = This setup from last Friday did not hit our initial buy stop trigger price of $23.06. However, we still like the setup, with a few modifications. Since the U.S. dollar is gapping down in the pre-market, we like the possibility of UUP “undercutting” support of its 20-day EMA, as the more significant 50-day MA is just below. As such, we’re now using a LIMIT buy order (not a buy stop) that seeks to take advantage of potential opening weakness of a gap down. We’ve also accordingly adjusted the stop price and share size. The reward/risk ratio on this buy setup is now even nicer, as “undercuts” of obvious support levels often provide the best returns.
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.
- We’ve raised the XLE stop, in order to lock in a small gain in the event of market correction. Still, the current stop gives XLE plenty of “wiggle room” below short-term support of its 20-EMA on the hourly chart.
- 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