Commentary:

After gapping higher on the open, stocks abruptly reversed lower yesterday morning, but stabilized less than an hour into the session. Thereafter, the major indices chopped around in a tight, sideways range throughout the rest of the day. Although the broad market begrudgingly rose in the afternoon, a sell-off in the final minutes of trading caused the main stock market indexes to finish slightly lower. The S&P 500 and Nasdaq Composite eased 0.1%, while the Dow Jones Industrial Average slipped 0.2%. Bucking the trend, the small-cap Russell 2000 gained 0.1%, marking its ninth consecutive advance. The S&P Midcap 400 was unchanged. The major indices closed near the bottom third of their meandering intraday ranges.

Total volume in the NYSE was 16% lighter than the previous day’s level. Turnover in the Nasdaq similarly decreased by 12%. It was the fifth day in a row volume failed to exceed 50-day average levels. In both exchanges, declining volume was on par with advancing volume. The lackluster trading, lighter volume, and flat market internals made for a rather uneventful session yesterday.

Although the sector has been quite choppy in recent weeks, the biotech industry continues to exhibit relative strength to the broad market. While the major indices have retraced about two-thirds of their recent losses, several biotech ETFs are now consolidating near their 52-week highs. Of the group, iShares Nasdaq Biotech (IBB) has been showing the tightest consolidation over the past week. The bullish pattern is illustrated on the daily chart of IBB below:

If IBB rallies above the four-day high of $85.66, it will break out above the high of its very short-term trading range, as well as the downtrend line from the January 2010 high. Such a move could present a trigger point for buy entry into IBB. However, it’s important not to “jump the gun” with a premature buy entry ahead of the actual trigger price. As for a protective stop, swing traders might consider placement just below the rising 50-day moving average (the teal line), presently at $82.77. If IBB falls back to near its recent lows again, we don’t want to be long.

In addition to IBB, we continue to monitor SPDR Gold Trust (GLD) for potential buy entry on a breakout above the high of its five-day range. The decreasing inverse correlation between gold and the U.S. dollar, which we discussed in yesterday’s commentary, still appears to be true. The U.S. Dollar Bull Index (UUP) moved lower yesterday, and GLD did too. On the short side, we still like the setup in PowerShares Base Metals (DBB). Showing relative weakness to the broad market, DBB fell 1.9% yesterday, and could already be on its way back down. But we’d ideally like to see a “stop run” or “overcut” of the 50-day MA, at least on an intraday basis, just to absorb some demand before selling short.

The broad market has basically been directionless for the past two days, and there has been a relative equilibrium of buying and selling pressure. This occurs as most of the major indices are still trying to convincingly break out above both their 61.8% Fibonacci retracement levels and 50-day moving averages. In a nutshell, the main stock market indexes are apparently at “make it or break it” levels that could soon lead to big moves in either direction. Because the bears seemingly remain in hibernation, and stocks are now in a very short-term consolidation, a breakout to the upside is certainly possible. Nevertheless, a substantial pullback would not be surprising because stocks have rallied straight into key resistance levels within a short period of time. Frankly, we don’t have that strong of an opinion regarding the market’s next move, which is exactly why we’ve been laying low over the past few days. With the exception of quick momentum trades, it may be a great time to take a “wait and see” approach to the market’s next move.

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Today’s Watchlist:

ProShares Short Nasdaq 100 (PSQ)
Long

Shares = 500
Trigger = $44.61 (above the two-day high and 50-day MA)
Stop = $43.68 (below the “swing low” of the past two days)
Target = $47.10 (test of February 5 high)
Dividend Date = n/a

Notes = Yesterday, we were stalking QQQQ for potential short sale, but it did not hit our trigger price for entry. Going into today, we’re stalking the same setup, but with buying the inversely correlated PSQ, rather than selling short QQQQ. Through buying the “short ETF,” traders can take this bearish position in non-marginable cash accounts (such as IRAs) if they so desire. Since PSQ is a non-leveraged “short ETF,” it maintains a very close inverse correlation to the underlying index.

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Gold Double Long (DGP)
Long

Shares = 200
Trigger = $28.02 (above the high of last week’s tight range)
Stop = $25.39 (below new support of prior downtrend line)
Target = new high (will trail stop)
Dividend Date = n/a

Notes = This setup from yesterday did not yet trigger, but remains on our watchlist going into today.

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iShares Nasdaq Biotech (IBB) – In addition to the PSQ and DGP setups above, we are also monitoring IBB for potential buy entry on a breakout above its recent range. If the breakout happens and we decide to enter, we’ll promptly send an Intraday Trade Alert with details.

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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:

• No changes to our open positions. Just riding out a healthy pullback in UUP, in anticipation of another leg higher.
• 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 support@morpheustrading.com if not already set up for this value-added feature we provide to subscribers.

Edited by Deron Wagner,
MTG Founder and Head Trader