The Wagner Daily


The major indices begrudgingly edged higher in the morning, floated back down in the morning, then closed near the flat line. The uneventful session caused both the S&P 500 and Nasdaq Composite to finish unchanged, while the Dow Jones Industrial Average slipped 0.1%. Maintaining their recent patterns of relative strength, the small-cap Russell 2000 and S&P Midcap 400 indices each managed to gain 0.2%. The Russell’s small advance pushed the index enough to join the S&P Midcap at closing at its highest level of 2010. However, all of the main stock market indexes closed in the bottom quarter of their intraday ranges.

Turnover eased across the board, as institutions backed off to allow stocks to digest their recent gains. Total volume in the NYSE declined 12% below the previous day’s level, as volume in the Nasdaq ticked 8% lower. Overall volume in the Nasdaq remained above its average level, but lighter than average in the NYSE. A bit concerning for bulls is that trading in the NYSE has only exceeded its 50-day average pace twice since the rally off the February 5 lows began. Nevertheless, lighter volume on a flat consolidation day that follows a rally is generally constructive because it indicates a lack of heavy selling into strength.

After oscillating in a sideways range for the past six weeks, the Energy sector may be poised for a breakout above its pullback consolidation that carries it back to its January 2010 high. Representative of the pattern shared by most of the energy ETFs is iShares U.S. Energy Sector Index (IYE), whose daily chart is shown below:

With major support of the 200-day moving average (the orange line) converging with the February 25 “swing low,” IYE is now positioned to break out above the high of its recent consolidation, which converges with the 50-day moving average (the teal line). Quite simply, a rally above yesterday’s high is our trigger point for buy entry. A protective stop could be placed below the February 25 low and 200-day MA (or below the 20-day exponential moving average for a tighter play with shorter time horizon). In addition to IYE, two other popular Energy ETFs are Energy Bull 3x (ERX) and ProShares Ultra Oil and Gas (DIG). Both have patterns very similar to IYE, but are leveraged ETFs. This means they can be traded on a very short-term basis with little ill consequence, but have the longer-term disadvantage of slightly underperforming the underlying index, due to of the daily rebalancing of their derivative portfolios. Nevertheless, traders with a short-term time horizon and/or small trading account might consider buying a breakout in ERX or DIG, rather than IYE. However, our “official” setup in today’s newsletter is a potential buy only in IYE.

In the current environment, we prefer buying ETFs that are reversing their downtrends after a pullback (such as our recent entry into FXI), rather than buying breakouts near the highs. While breakout plays can be very profitable in strong bull markets, the S&P, Nasdaq, and Dow have not proven they’re capable of moving back to their January 2010 highs without first making another leg lower. As such, we’re more comfortable buying bullish trend reversals of formerly strong ETFs that have pulled back. Still, for those of you who are trade with a very rapid time horizon, giving you greater ability to quickly react in the event of a failed breakout, we’ll leave you with a potential breakout play to consider for a quick pop if it goes:

Today’s Watchlist:

iShares U.S. Energy Sector Index (IYE)

Shares = 250
Trigger = $33.41 (above yesterday’s high and the recent consolidation)
Stop = $31.54 (below the Feb. 25 “swing low” and 200-day MA)
Target = new 52-week high (will trail stop)
Dividend Date = late March of 2010

Notes = See commentary above for explanation of the setup.

In addition to IYE, we’re still monitoring iShares Nasdaq Biotech (IBB) for potential pullback entry, and will promptly send an Intraday Trade Alert if/when it hits our target pullback price.

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. FXI now consolidating in a tight range, above its 50-day MA. Still looking good for further gains in the near-term.
  • 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