Unable to follow through on Tuesday’s bullish reversal action, stocks opened lower and sold off sharply during the first 90-minutes of trading. By 11:15 a.m. the major averages had erased all of Tuesday’s gains (on heavier volume) and undercut last week’s swing low. The ominous start turned out to be more bark than bite, as broad market averages bottomed out at mid-day, and climbed nearly 1% higher into the close. The afternoon rally lifted the averages off the lows of the session to close near the middle of the day’s range and back above the 20-day EMA. The Russell 2000 gave back 1.5%. The Nasdaq Composite fell 1.3%. Both the Dow Jones Industrial Average and S&P 500 shed 1.1%. Mid-caps fared the best, with the S&P 400 down just 0.8%.
Total volume jumped 19% above the prior days level on the Nasdaq, while NYSE volume ticked just 2% higher. Though the main averages attempted to rally into the close, the 1% loss across the board registered yet another bearish distribution day.
We continue to see bullish setups develop in the energy sector. Most of these patterns share the same cup and handle type look, as they are currently in pullback mode after a strong run up off the December lows. ProShares Ultra Oil & Gas (DIG) is the leveraged ETF representing a nice mix of industry groups within the sector. The daily chart below details the bullish action:
After a strong run up off the lows of December, DIG has pulled back and undercut support of the 20-day EMA. With the 50-day MA just below, we may see a few more days of consolidation or shakeout action, but the setup is buyable over the short-term downtrend line in red.
Sticking with energy, the next setup is a more focused play in natural gas stocks. First Trust Natural Gas (FCG) is setting up much like DIG (FCG tracks an index of natural gas stocks.)
FCG has held support of the 20-day EMA with two shakeout attempts on Jan. 13 and Jan. 20. Look for a break of the downtrend line as a potential entry point. As mentioned above in the DIG setup, there could be a few more days of downside before the pullback bottoms out and is ready to move higher. The best setups are often not so clean, as there are usually a few shakeouts to run the stops before the uptrend resumes.
Switching from energy to financials, we continue to see the breadth of the financial sector improve with bullish charts in XLF, KIE, KBE, and RKH. We can also add the SPDR S&P Homebuilder (XHB) to this list. The weekly chart of XHB below shows a strong four month base that has formed a cup and handle type pattern.
Intermediate-term traders can establish a buy entry on a pullback to the 10-week MA, which would also coincide with the uptrend line around the $15.00 level. If nothing else, we can just use this chart as evidence that the breadth is expanding.
Yesterday’s reversal off the lows into close on the S&P 500 has created an obvious pivot level to monitor. Should the price action return back below this point (1,129), then we would expect a deeper pullback to the 50-day MA, around 1,113. A correction to the 50-day MA is only a 3% to 4% pullback off the January high. We could just as easily see this market continue to chop around in a range during earnings, which would allow the 50-day MA to catch up to the price action.
The wide ranged, chop fest in the broad market over the past three sessions can be very dangerous to a swing trader’s P&L and confidence. Bullish setups that stop out tend to look good the very next day since there is very little follow through to either side of the market. It then becomes very easy to overtrade, as the setup never really falls apart. Traders should remain mostly in S.O.H. (sit on hands) mode, with very minimal exposure for the next few days.
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.
- Per intraday alert, we added 400 shares to our position in UUP at 23.09.
- 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.
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Edited by Deron Wagner,
MTG Founder and Head Trader