Volatility Index ($VXZ) Ready to Rip Higher?

market timing model:

Sell Mode
– Timing model generated sell signal on close of April 3 (click here for more details)


Note the position sizing in $VXZ. The size is now based on a $100,000 portfolio. A typical full sized loss should now be around 1% of account equity or $1,000. A half position is 0.5% of account equity or $500. $VXZ is sized for a $500 loss, which is a half position. Please make sure your position size in in line.

today’s watchlist (potential trade entries):

$todays watchlist
Having trouble seeing the open positions graphic above? Click here to view it directly on your web browser instead.

open positions:

Below is an overview of all open positions, as well as a report on all positions that were closed only since the previous day’s newsletter. Net P/L figures are based on two separate $50,000 model portfolios (one for ETFs and one for stocks). Changes to open positions since the previous report are listed in pink shaded cells below. Be sure to read the Wagner Daily subscriber guide for important, automatic rules on trade entries and exits.

$todays watchlist
Having trouble seeing the open positions graphic above? Click here to view it directly on your web browser instead.

closed positions:

open position summary
Having trouble seeing the closed positions graphic above? Click here to view it directly on your web browser instead.

ETF position notes:

  • Covered $XME on the open to lock in gains. Stopped out of $SMH and $ITB.

stock position notes:

  • Sold $HCA on the open to lock in a small gain. Stopped out of $SODA.

ETF, stock, and broad market commentary:

Stocks sold off sharply yesterday, just one day after several of the major indices edged to new multi-year highs. The Dow Jones Industrials shed 0.8%, while both the S&P 500 and NASDAQ Composite tumbled 1.1%. The most negative thing about yesterday’s session was that the decline occurred on substantially higher volume as well. Turnover in the NYSE jumped 23%, while volume in the NASDAQ was 15% higher than the previous day’s level.

In yesterday’s newsletter, we said, “it wouldn’t take much more than one more clear distribution day to shift our timing model to a sell signal.” Since a “distribution day” occurs whenever the major indices decline on higher volume, yesterday’s session definitely qualifies as another clear instance of selling amongst banks, mutual funds, and hedge funds, and other institutions. Furthermore, deterioration and breakdowns in leading stocks accelerated yesterday, thereby confirming the institutional selling.

The combination of the broad market suffering its fifth distribution day in recent weeks, leading stocks and sectors breaking down, and a few other proprietary elements, was enough for our market timing model to shift from “buy” signal to a new “sell” signal as of yesterday’s (April 3) close.. In case you are new to our market timing system, click here and scroll down to “Sell” to read how this change to read how this change specifically affects our bias with regard to new ETF and stock swing trade entries.

Last night, we (Deron and Rick) spent several hours manually scanning the chart patterns of more than 900 stocks and ETFs. While the MTG Stock Screener is a fantastic time saver in steadily trending markets, markets in transition require the added interaction of human discretion, which is one of the key reasons traders subscribe to The Wagner Daily newsletter.

Just because our market timing model is now on a new “sell” signal, does NOT mean we should immediately start selling short stocks and ETFs with reckless abandon. Why? Because one of the main rules of our trading strategy is that we always trade in the dominant direction of the broad market trend.

Since the main stock market indexes still remain in a dominant uptrend, the best way to presently interpret our new sell signal is merely as a sign to exit long positions and/or substantially tighten stops on them. However, if the main stock market indexes start to breakdown below their uptrend lines (several of which were highlighted in yesterday’s newsletter), then we will more aggressively seek to enter new short positions and/or inverse ETFs.

The CBOE Market Volatility Index ($VIX) is a contrarian index that essentially measures the level of fear in the market at any given time (which is based on market volatility). The lower the price of the index, the less fear in the market. Generally speaking, the less fear in the market, the greater the chances of a significant market correction being around the corner.

In mid-March, the $VIX was trading at its lowest level since LATE 2007. Since then, it has moved slightly higher, and is now forming a short-term base just off its low. Given that we are now on a new sell signal, which means market conditions have suddenly gotten very ugly, there’s a strong possibility we will see a swift spike in the $VIX in the coming days (hence the potential buy setup in $VXZ that follows). The long-term monthly chart of $VIX is shown below:


Going into today, iPath S&P 500 VIX Mid-Term Futures ($VXZ) is a new “official” ETF buy setup on our watchlist. First of all, I must be very quick to point out this potential trade does NOT fall within the technical parameters of our normal methodology for buying trend reversals. Rather, this is intended to purely be a momentum-based trade of a very short-term nature (estimated 2 to 5 days holding time). The daily chart of $VXZ is shown below:


Although this is not our usual type of setup for a trend reversal, there are still some valid technicals that explain our entry, stop, and target prices. Our trigger price for buy entry is just above the 20 day exponential moving average, which converges nicely with the downtrend line (right above the four-day high). As for the stop price, it is simply placed very tightly below the lows of the six-week price consolidation. The initial target price is a 50% Fibonacci retracement from the December 2012 high down to the recent lows.

We still have $QQQ on our internal watchlist as a potential short entry (or inverse ETF entry), due to the head and shoulders pattern on its weekly chart (click here for a review of that recent analysis). However, that setup has not yet met our requirements for new trade entry.

On the stock side, we stopped out of $SODA and are still long $PRLB. We sold $HCA on the open to lock in a small gain.

The past few days has been brutal for leading stocks, with many extended charts selling off 10% or more on heavy volume the past few days. Leading names in airlines, trucking, energy, finacials, construction, and general contractors have been hit hard and will need a few weeks to repair the damage.

Here are a few chart patterns to watch next week if the market is able to gain some traction:




relative strength combo watchlist:

Our Relative Strength Combo Watchlist makes it easy for subscribers to import data into their own scanning software, such as Tradestation, Interactive Brokers, and TC2000. This list is comprised of the strongest stocks (technically and fundamentally) in the market over the past six to 12 months. The scan is updated every Sunday, and this week’s RS Combo Watchlist can be downloaded by logging in to the Members Area of our web site.

Please leave your comment below!

Your email address will not be published. Required fields are marked *