The Wagner Daily


Building on the momentum of Monday’s strength, the major indices scored another round of solid gains yesterday. This time, higher volume also confirmed the move. Less than an hour after opening near the flat line, stocks entered into a steady uptrend that persisted throughout the entire session. The S&P 500 advanced 1.3%, the Dow Jones Industrial Average 1.1%, and the Nasdaq Composite 0.9%. Maintaining the same order of relative strength, each of the three major indices registered a gain that was approximately 0.1% lighter than its previous day’s gain. The small-cap Russell 2000 and S&P Midcap 400 indices rose 0.8% and 1.4% respectively. All the main stock market indexes closed near their intraday highs.

In both the NYSE and Nasdaq, total volume was 13% greater than the prior day’s level. The higher volume gains enabled both the S&P and Nasdaq to record a bullish “accumulation day,” an unusual occurrence in recent weeks. While the increased volume was positive, and hinted at the return of institutional buying, turnover in both exchanges only marginally exceeded average levels. Another session of accumulation in the coming days would help to prove this single instance of higher volume gains wasn’t a fluke. In the NYSE, advancing volume exceeded declining volume by a strong margin of 5 to 1. The adv/dec volume ratio in the Nasdaq was positive by just under 3 to 1.

Jumping 2.7%, the Biotechnology Index ($BTK) was one of the leading sectors yesterday. In our February 1 commentary, we pointed out the relative strength in iShares Nasdaq Biotech Fund (IBB), and said it was a potential short-term buy setup that would likely take off when the market eventually managed to bounce on higher volume. Indeed, IBB rallied 2.1% yesterday, but the performance of the S&P Biotech SPDR (XBI) was even better. In addition to registering a 2.8% gain, XBI actually broke out to a fresh 52-week high yesterday. It is the only ETF in our watchlist of 300 ETFs presently trading at a new high. On the daily chart below, notice that volume during yesterday’s breakout surged to more than 300% its average daily level, a sign of institutional accumulation:

With at least one day of higher volume gains on the board, traders may now be slightly more comfortable with dipping a toe in the long side of the market. If looking for a new ETF to buy, in anticipation of a possible short-term bottom in the market, XBI may be your best bet. Now that there is no overhead price resistance to contend with, XBI may have the best odds of continuing higher in the near-term, if the broad market doesn’t suddenly fall apart again. If buying XBI, we have two points for consideration: 1.) This is not a good environment to chase ETFs that are extended much beyond their breakout levels. Therefore, one might patiently wait for a small pullback, to the area of yesterday’s breakout level (around $56.50 to $56.75), before buying XBI. 2.) As with all new long entries right now, one should consider reducing share size to about 50% of normal share size, in order to limit capital risk while the market is still in correction mode.

Yesterday, we said of the S&P 500, “The 1,101 level is the first significant area of resistance the S&P may encounter, as that price marks the highs of the prior bearish consolidation (from January 25 to 28), as well as the highs from October 2009. Beyond that, the 20-day exponential moving average is presently at 1,110. The more significant 50-day moving average is at 1,113. If the S&P manages to get past the 1,101 area, the 1,110 – 1,113 area may be much more difficult to overcome.” Rallying to close the day at 1,103, the S&P managed to overcome the 1,101 resistance level we pointed out. But over the next few days, the index will be faced with more significant resistance and overhead supply. As such, be prepared for higher than usual volatility and indecision, as there is likely to be a tug-of-war between the bulls and bears when the major indices start bumping into their 20 and 50-day moving averages.

One way to limit your risk in an uncertain environment, while still positioning your portfolio for profitability, is to be positioned on both sides of the market, long a strong ETF, while initiating a new short sale on a relatively weak ETF, as the S&P 500 runs into resistance. In the past, we’ve found it quite possible to simultaneously profit from both long and short positions, particularly when the broad market is indecisive or in transition. The key, however, is to make sure the long position is showing great relative strength, and the short position is showing clear relative weakness.

On the long side, XBI is an obvious choice. As for the short side, let’s rewind back to the January 26 issue of The Wagner Daily, where we said of the bearish pattern in iShares Real Estate Index Trust (IYR), “we’re monitoring IYR for possible short entry on a bounce to the $45 to $45.50 area. But rather than actually selling short IYR, we may simply use its chart pattern to time a buy into the inversely correlated UltraShort Real Estate ProShares (SRS) instead.” Yesterday, IYR finally bounced to that $45 to $45.50 area. This is shown on the daily chart below:

Closing at $44.95, IYR is now at resistance of its 50-day moving average (the teal line), just a few pennies above its 20-day exponential moving average (the beige line). In addition to resistance of these two moving averages, there is significant resistance from the prior price consolidation throughout the first three weeks of January (marked by the dotted horizontal lines). With all this overhead supply, as well as a dominant uptrend line that has already been broken, the path of least resistance for IYR is likely to be down, at least in the near-term. We like IYR for short entry, anywhere near its current price. A protective stop could be placed above the January 19 high of $46.74. If IYR manages to get all the way above that prior consolidation, it will have lost its relative weakness, and could easily move to a new high; we would want to be out quickly if that occurs. An approximate price target for the short sale is support of the 200-day MA, which is converging with major support of the October 2009 lows (around $39.50). As mentioned previously, traders might alternatively consider buying SRS, an inversely correlated “short” ETF, rather than selling short IYR. However, the pattern of IYR could be used to determine corresponding actions taken in SRS, as it’s better to follow the actual price action in the associated non-inverse ETFs.

Today’s Watchlist:

UltraShort Real Estate ProShares (SRS)

Shares = 800
Trigger = buying at market (approx. $7.72), five minutes after today’s open
Stop = $7.14 (just below the Jan. 19 low)
Target = n/a (will trail a stop based on price action)
Dividend Date = n/a

Notes = See commentary regarding IYR above, as this is the same setup, but with an inverse ETF. As with all leveraged and inverse ETFs, we are aware the compounding of daily returns means there is a lower correlation to the underlying index (IYR) as the length of the holding period increases. However, SRS is intended to be a short-term trade, so there is not likely to be a huge divergence. Traders with marginable accounts may choose to sell short IYR instead of buying SRS. But our “official” entry is into SRS, so that subscribers with cash accounts (such as IRAs) can also participate if they desire.

In addition to SRS, we are also monitoring XBI for a pullback, and will send an alert if we see an ideal entry point. In the meantime, we already have several other long positions to balance out our new short entry into the real estate sector.

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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  • No changes to our open positions at this time.
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Edited by Deron Wagner,
MTG Founder and Head Trader