market timing model: 

SELL (click here for more details)

today’s watchlist (potential trade entries):

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 red shaded cells below. Be sure to read the Wagner Daily subscriber guide for important, automatic rules on trade entries and exits.

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closed positions:

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ETF position notes:

• MZZ and FXP entries triggered. Sold IBB at market on the open to lock in a + $160 gain.

stock position notes:

• GOOG short entry triggered. Sold LF for a small + $100 gain and sold AMLN for a scratch loss.
• We cancelled the KORS short setup.

ETF and broad market commentary:

In a quiet day of trading, stocks rebounded on Friday but only reclaimed some of the losses from Thursday’s dismal performance. The small-cap Russell 2000 added 1.4%, while the Nasdaq climbed 1.2%. The S&P 500, S&P MidCap 400 and the Dow Jones Industrial Average tacked on 0.7%, 0.6% and 0.5% respectively.

Internals were bullish on Friday but these numbers must be interpreted with caution. Volume surged higher on both exchanges but the higher trade is directly attributable to the rebalancing of the Russell stock indices. Trade increased on the Nasdaq by 27.4% and on the NYSE by 5.9%. Advancing volume outpaced declining volume by 2.1 to 1 on the NYSE and 3.0 to 1 on the Nasdaq. Technically, Friday would be classified as an accumulation day. However, given the impact of rebalancing, Friday’s volume numbers are difficult to interpret and may be suspect.

On Friday, the ProShares UltraShort MSCI Emerging Markets ETF (EEV) consolidated near the highs of Thursday’s powerful move. EEV may provide a buying opportunity if it continues to consolidate near the two day high and forms a pivot, such as a bullish pennant. We will be monitoring this inverse ETF closely for a potential buy entry.

At the opening bell, we exited our position in IBB for a modest gain. Following its big run up on Thursday, UUP spent the session consolidating above its 20-day EMA and appears likely to continue its move higher this week. Our watchlist candidates, FXP & MZZ, both triggered on Friday and we now are long both inverse ETFs. Friday’s price and volume action, although somewhat suspect, still added confusion to a market that is trying to establish a direction. We advise treading carefully through the current market landmine.

stock commentary:

For those who are new to the Wagner Daily, we prefer to hold stocks two to four weeks to capture gains in the 15-25% range. Over the past week we’ve held on to stocks for just a few days and the reason for this is because our market timing model just generated an unconfirmed buy signal and we are playing it close to the vest. An unconfirmed buy signal means that it is o.k. to begin buying stocks, but we must do so with reduced share size and tight stops. When the model shifts into buy mode after a few months of selling action the goal is to enter a few positions and closely monitor the feedback from the market. Are there enough breakouts to buy? Are new breakouts holding up or failing? Are stocks breaking out in numbers? If the answer to most of these questions is no, then our focus quickly shifts from offense to defense when distribution hits the market. For example, if Thursday’s selloff occurred a few weeks from now and we had already booked several winners it would have not been a big deal, as we expect to see some distribution during a rally and we would have continued to focus on offense. However, an ugly distribution day just a few days after a new buy signal and poor price action in recent breakouts forced us into capital preservation mode.

 

We established one new short position in GOOG which triggered last Friday on the open. KORS did not trigger but we canceled the short setup. Although GOOG is a large position in our account going by percentage of equity in use (around 30%), the actual trade risk is around $300 which is just about half of our $500-$600 max risk.

There are no new setups today. Although the timing model is now on a sell signal we are still monitoring our internal watchlist for potential entry points in TDG, ALXN, ZUMZ, VVUS, AMLN, MDVN, CSTR, AEO, CBRL, GHDX and HW.

If you are a new subscriber, please e-mail rick@morpheustrading.com with any questions regarding our trading strategy, money management, or how to make the most out of this report.
relative strength watchlist:

Our Relative Strength (or RS) 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 100 (or so) stocks in the market over the past six to 12 months. The scan is updated every Sunday, and this week’s RS Watchlist can be downloaded by logging in to the Members Area of our web site.