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The Wagner Daily


Commentary:

Stocks followed up the previous day’s rally with a round of modest, broad-based gains in a mixed-volume session. After opening higher, the major indices fell back to the flat line at mid-day, but the broad market grinded its way back to positive territory shortly thereafter. The rest of the day was marked by tight, range-bound trading that persisted into the close. The Nasdaq Composite finished 0.6% higher. The S&P 500 and Dow Jones Industrial Average registered matching gains of 0.4%. The small-cap Russell 2000 rose 0.7%, as the S&P Midcap 400 similarly advanced 0.6%. All the main stock market indexes closed near their intraday highs.

Total volume in the NYSE was 6% lighter than the previous day’s level, while turnover in the Nasdaq ticked 2% higher. When stocks were trending lower in the morning, turnover in both exchanges was tracking substantially higher. Then, as stocks stabilized and unconvincingly attempted to move higher, volume levels receded. Such an intraday volume pattern is negative, as it points to bearish “churning,” a scenario that occurs when institutions stealthily sell into strength near the highs of a recent move. Since yesterday was basically a consolidation day, lighter volume in both exchanges would have actually been better.

In yesterday’s commentary, we highlighted Tuesday’s pullback in the U.S. Dollar Bull Index (UUP), and suggested the short-term correction provided a low-risk, secondary buy entry for traders who missed the initial breakout. Although one might have expected it to move lower for another day or so, and at least test its 20-day moving average, UUP gapped higher on yesterday’s open, then zoomed to close above the previous day’s high. As such, the two-week consolidation, just a “correction by time,” may soon propel UUP to a fresh high within its intermediate-term uptrending channel. Notably, the stock market held firm despite yesterday’s resumption of strength in the greenback.

In the February 17 issue of The Wagner Daily, we said, “The main stock market indexes have already moved to levels that now force savvy traders to question the reward-risk ratio of new long entries at current levels. With resistance of their early February ‘swing highs,’ the 50% Fibonacci retracements, and even the 50-day moving averages just overhead, it’s going to take a lot more power, in the form of higher volume, for stocks to blast through all those levels. While there may be additional upside in the coming days, such as a rally to the 61.8% Fibonacci retracement levels, it’s a negative reward-risk ratio to buy when the potential losses are greater than the likely upside gains in the near-term. If anything, a test of the 61.8% Fibonacci retracements and 50-day moving averages may provide ideal short entry points for the near-term.” Because ysterday’s subsequent gains now put the major indices even closer to their 61.8% Fibonacci retracements and 50-day moving averages, that same analysis of new long positions being a negative reward-risk ratio is even more significant going into today’s session.

After scanning hundreds of ETF charts last night, we didn’t find anything that thrilled us on the long side. A select few ETFs have already broken out above ranges of consolidation, but we’re not interested in chasing prices when the major indices are coming into key resistance levels. Other ETFs have yet to make substantial upward progress off their lows, but we’re certainly not excited about buying those because they’re exhibiting clear relative weakness to the broad market. Therefore, we believe the best plan of action right now, other than perhaps “dipping a toe in the water” with light exposure on the short side, is to patiently sit on the sidelines, waiting for the market’s next move.

If looking for a new short trade, we do not recommend selling short into strength of a market that is grinding higher every day. Such action makes it difficult to remain in short positions, even if entered at proper levels of resistance. Instead, consider selling short one of the broad-based ETFs (SPY, DIA, QQQQ) on the first day the broad market gaps down to open substantially below the previous day’s close. Then, a tight stop could be placed just above that morning’s high, thereby providing a positive reward-risk ratio for a quick, momentum-driven short trade (perhaps even a daytrade). For trades with a short-term time horizon, the inversely correlated “short ETFs” provide a nice alternative to selling short the broad-based ETFs.


Today’s Watchlist:

UltraShort Dow 30 ProShares (DXD)
Long

Shares = 500
Trigger = $29.83 (just above yesterday’s high)
Stop = $28.89 (below yesterday’s low, plus some “wiggle room”)
Target = $32.50 (test of February 5 high)
Dividend Date = n/a

Notes = The Dow Jones Industrial Average (the index this ETF inversely tracks) is at resistance of its prior “swing highs” from early February, with resistance of the 50-day MA just overhead. If the Dow is going to head back down and resume its downtrend from last month, this is roughly the area where one might expect it to happen. However, rather than selling short into strength, which can be dangerous, we’re planning to sell short the Dow when it at least shows signs of weakness by breaking below the prior day’s low (as described in the commentary above). If the break of yesterday’s low does not happen today, we will patiently wait for a better entry to buy DXD.


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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    Notes:

  • Per Intraday Trade Alert, we lowered the trigger price in FXY after it gapped down to “undercut” support yesterday morning. When FXY subsequently reversed to a new intraday high, the setup triggered for buy entry, and FXY initially appeared as though it would continue higher the rest of the day. However, it rolled over in the afternoon, back to its intraday low. As such, we made a judgement call to sell FXY for a small loss, ahead of its stop, rather than risking a full loss on the trade. Buying a rally to a new intraday high on an “undercut” is often a rather profitable play, but it simply didn’t work this time around. No big deal, moving on to the next trade. . .
  • 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

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