The Wagner Daily


The major indices concluded the month of January with another day of substantial losses last Friday, as higher volume indicated continued institutional selling. Stocks initially got off to a positive start, but turned tail after the first hour of trading, and continued lower throughout the rest of the session. The S&P 500, up 1.1% at its intraday high, finished 1.0% lower. Relative weakness in the tech arena caused the Nasdaq Composite to tumble 1.5%. However, the Dow Jones Industrial Average held up relatively well, losing just 0.5%. The small-cap Russell 2000 and S&P Midcap 400 indices shed 1.0% and 1.4% respectively. Each of the main stock market indexes settled finished near its low of the day, week, and month.

Total volume in the NYSE swelled 31%, while volume in the Nasdaq rose 11% above the previous day’s level. When stocks were trading higher in the morning, turnover was on pace to be significantly lighter, but volume levels picked up sharply when the broad market subsequently headed south. Such action is the opposite of what investors want to see in a healthy market, as it tells us mutual funds, hedge funds, and other institutions were clearly distributing shares. Since more than half of the stock market’s average daily volume is derived from institutional trading, the market’s short-term trend is typically determined by the activity of institutions. A daily analysis of the NYSE and Nasdaq price to volume relationship is a great way to see “under the hood” of the market, which provides an accurate snapshot of the market’s overall health.

In last Friday’s commentary, we illustrated how the S&P 500 might stage a short-term bounce if it rallied above resistance of its hourly downtrend line. On that day’s open, the index indeed gapped above that trendline in the first hour of trading, but failed to remain above it. Further, astute traders would have been suspicious of the initial rally attempt because it lacked the confirmation of higher volume. Nevertheless, the S&P could just as easily rally above its short-term downtrend line in today’s session. If it does so and sticks, and only if higher volume confirms any rally, swing traders may find a few momentum-based trade setups that have the potential to provide quick profits on the broad market’s bounce.

When the main stock market indexes have pulled back substantially off their highs, it becomes much easier to find ETFs exhibiting the most relative strength to the broad market. Specifically, those that remain near their highs, even as the major indices have dropped, can be said to have the most relative strength. Stocks and ETFs so strong that they hold firm when the rest of the broad market drops are usually the first to surge higher when the major indices eventually bounce as well. Therefore, since we could soon see a tradeable bounce in the main stock market indexes, let’s take a look at a few ETFs still exhibiting relative strength. Consider putting the following tickers on a watchlist so their performance can quickly be assessed when the broad market catches a bid:

After three straight weeks of losses, the S&P 500 enters the month of February well below support of its 50-day moving average, and approximately 7% below its 52-week closing high from January 19. Trading at its lowest closing level since November 6, the index has also sliced through support of its mid-November to December consolidation. But even though extensive selling has occurred in a short period of time, the current technical picture of the S&P 500 merely resembles its pattern from mid-June to early July of 2009. Back then, just like the present, the S&P fell through its 50-day MA, and traded as low as 7% off its 52-week high. Preceding volume patterns were also negative, as they typically are before a correction begins. Yet, institutional buying returned to the markets, one month after the pullback began, sending the major indices to fresh 52-week highs just a few weeks later. Will history repeat itself this time?

One distinct difference between this correction and the pullback from June/July of 2009 is substantially more leading stocks have broken down. In the June/July correction, most of the strongest stocks held firm while the major indices retraced lower. However, the charts of Nasdaq giants such as Apple Inc. (AAPL) show a different picture this time around. While this does not necessarily mean the dominant uptrend of the past ten months is over, odds are decent this pullback may last a bit longer than others we’ve seen. Still, even if it does, there will likely be tradeable bounces along the way. Keeping a constantly updated watchlist of stocks and ETFs with the most relative strength, then buying upon the first sign of higher volume gains, is a great way to profit from quick, momentum-based swing trades on the long side.

Today’s Watchlist:

There are no new setups in the pre-market today. We’re on the lookout for a tradeable, short-term bounce in the stock market, but we want to ensure any rally is confirmed by higher volume before considering new long entries. On the short side, we’re still monitoring the inversely correlated UltraShort Real Estate ProShares (SRS), but we’d prefer to have the market bounce a bit before getting short again. If we spot any compelling trades for entry today, 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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  • Because EWJ closed so near its stop price, we’ve adjusted the stop 10 cents lower, in order to provide a bit of “wiggle room” below support of last Friday’s low. Since it was sized for just 50% of our normal capital risk, the slightly wider stop still keeps risk well within our parameters. We also adjusted the UUP stop higher, up to breakeven now, and will continue to squeeze the stop tighter as price action warrants.
  • 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