A wild trading session kept both the bulls and bears on their toes yesterday, but stocks finally closed with a solid round of gains. The major indices gapped several percent lower on the open, attempted to recover in the first hour, then dipped to new intraday lows by mid-day. Buyers subsequently arrived in full force several hours later, reversing staggering losses in many sectors. Whipping around in a breathtaking 600-point intraday range, the Dow Jones Industrial Average eventually settled 2.5% (299 points) higher. The S&P 500 similarly gained 2.1%, but relative weakness in large cap techs held the Nasdaq Composite to a 1.1% gain. Small-cap stocks continued to show relative strength, sending the Russell 2000 Index 3.3% higher. Our long position in the ProShares Ultra Russell 2000 (UWM), which we bought near the previous day's low, zoomed 6.7%. It also closed just shy of our six-point price target. The S&P Midcap 400 rose 2.3%. For the first time in a week, all the major indices finished at their intraday highs.
Total volume in the NYSE increased 11%, while volume in the Nasdaq rose 17% above the previous day's level. The substantial gains on strong volume enabled both the S&P and Nasdaq to score a rare "accumulation day," indicative of institutional buying. Turnover again swelled to fresh multi-month highs. Trading picked up for the fourth straight day. Advancing volume in the NYSE exceeded declining volume by nearly 3 to 1. The Nasdaq adv/dec volume ratio finished only marginally positive, but was firmly negative by 4 to 1 earlier in the day.
When the stock market is in a strong downtrend, there are two main things we look for to determine where a short to intermediate-term bottom might form. The first is "capitulation." This occurs when stocks that are already beaten down plummet even further on sharply higher volume, then the market subsequently reverses just as strongly. Capitulation is the point at which those who held on the whole way down and didn't quickly cut their losses finally throw in the towel and sell at any price. This enables institutions to scoop up shares at "bargain" prices, instantly reversing the momentum. One could say with a fair degree of confidence that yesterday was a day of capitulation.
Another technical formation that helps us predict near-term bottoms in downtrending markets is a successful test of prior lows that were set within the past several days (a "double bottom"). Just after mid-day yesterday, we noticed that several of the major indices dipped below and "undercut" the prior day's lows, but held firm and refused to go lower. The "undercut" of the prior day's lows is significant because it washes out the "weak hands" who had their stops set just below yesterday's low. This absorbs overhead supply and makes it easier for stocks to subsequently rally.
Upon noticing the potential double bottom off the prior day's lows in the broad market, we sent a real-time e-mail alert to subscribers of The Wagner Daily, informing them of our decision to buy the ProShares Ultra S&P 500 (SSO) if the S&P 500 Index moved above its intraday downtrend after successfully forming a short-term the double bottom. That occurred shortly thereafter, triggering our long entry into SSO at a very nice price. The S&P 500 ripped 4% after our entry into SSO, sending SSO more than 8% higher. The 15-minute intraday chart of SSO below illustrates the near-term "double bottom" formation, as well as our entry point yesterday afternoon:
Presently, SSO is showing a gain of 5.6 points since yesterday's entry. However, we believe it should continue higher over the next several days. As with the UWM entry, our profit target in SSO is just below resistance its 10-day moving average ($72.22). Going into today, we can now trail a stop higher to protect our profit while maximizing the gain. Specifically, the 20-MA on the hourly chart should now act as firm support on a pullback.
If you sold long positions near yesterday morning's lows, the afternoon rally might have been rather frustrating. If this happened, I would like to humbly remind you of the power of re-entering positions when they eventually go the right way. As a novice trader, I used to have an illogical mental block against re-entering stocks at a higher price than I sold just an hour or day before. I thought that perhaps I was getting in at too high of a price and shouldn't be "chasing" the stock, but the stock would then go on to rally many points higher. Although it's certainly true that paying up a dollar or two on the entry price results in lower profit than staying with the original entry, the benefits are worth it. Consider this -- Would you rather net "only" a 6-point gain out of a 10-point move, or net 0 points out of it? As long as the reward/risk ratio is not significantly skewed by your re-entry price, then by all means be sure to re-enter, even if at a higher price. Further, ETFs and stocks that just scared everyone out are all the more likely to zoom higher when they resume their bullish upward momentum. This is due to some of the overhead supply immediately being absorbed.
The combination of yesterday's "capitulation" and "double bottom" formation means that stocks are likely to continue higher in the short to intermediate-term. However, it is unlikely that the lows of the past two days will be the ultimate lows of the new bear market. Traders who properly respect risk should begin seeing tradeable buying opportunities in ETFs with relative strength and reversal patterns on their daily charts. Still, wise traders and investors must remember the overall market remains firmly in a downtrend. We'll capitalize on the long side of the market as long as we are able, but ideal short selling entry points will begin to present themselves when the buyers eventually dry up again. Staying nimble, reducing your share size, and taking profits quicker than usual are still the keys to profiting in the current market.
If you wish to learn about Morpheus Trading Group's ETF trade entries on the same day they occur, sign up for a free trial to The Wagner Daily or other MTG services by clicking here (limit one per household). Also, remember that all previously published issues of both The Wagner Daily and The Wagner Weekly are available in the MTG archives. If you are new to our services or wish to broaden your knowledge of ETF trading or our general trading style, we recommend you browse the archives because it is educational and free! Click here to visit the Wagner Daily archives or here to visit the Wagner Weekly archives.
In this column, MTG presents you with a FREE, actual trade setup that we are stalking for entry at some point during the week. Note that, unlike the daily guidance that regular Stalk Sheet subscribers receive, this free Stalk of the Week does not take into account overall broad market conditions that can easily affect the trade over the next several days. This week's setup is:
Click to receive your free 1-month trial to The MTG Stalk Sheet so that you can receive an average of one to three trade ideas such as this one on a daily basis (limit one free trial per household). Subscribers are always provided with detailed entry, stop, and target prices for each trade, and intraday e-mail alerts are sent as needed.
Below is the weekly commentary that accompanied the most recent ETF Trend Tracker, e-mailed to subscribers last weekend. The Morpheus ETF Trend Tracker, a perfect supplement to the ETF Roundup guide, is a comprehensive table of Exchange Traded Funds (ETFs) designed for informed investors and longer-term traders who prefer to hold their ETF positions for a few weeks to several months at a time. Based exclusively on a weekly analysis of trendlines on the daily and weekly charts, the ETF Trend Tracker provides subscribers with a thorough snapshot of the primary trend direction of ETFs in every category from broad-based to industry sector to international. This information is e-mailed to subscribers weekly, in a user-friendly format that groups ETFs based on the direction of their primary trends.
Commentary:The S&P 500 SPDR (SPY) broke support of its primary five-year uptrend line last week, triggering substantial losses in the broad market. There is some hope for indices that have not yet breached support of their March 2007 lows. These include the Dow 30 (DIA) and the Nasdaq 100 (QQQQ). So far, no short-term bottoming patterns have developed in the main stock market indexes. However, many of the major indices are now glued to the lower boundary support of their downtrending channels. This increases the chance for a technical bounce in the coming week, though we certainly would not look to aggressively buy it.
Last week's overly bearish session shoved the last of the Industry sector ETFs onto the "descending trend" list. Even so-called "defensive" sectors, such as Pharmaceuticals, got hammered. If you've taken short positions on any ETFs on the "descending trend" list, you should now be showing a gain. With the exceptions of US Natural Gas (UNG) and Euro Currency (FXE), every ETF on the list is now showing a gain since triggering to the descending trend. Nevertheless, we are beginning to play it cautious by tightening stops on the short side. The technique is complicated, but the end product is the updated stops posted in the latest ETF Trend Tracker report. Please review this issue carefully for important stop level changes, remembering to click on tickers of interest to view annotated charts. We are now poised to stalk ETFs in the descending trend to reverse, and will enjoy the rewards when trends begin to change direction. The Reversal Stop (S2) is our trigger to buy (for descending ETFs), and is always posted prior to it happening. That is the key! You can set your trades up before prices race by and leave you behind wondering, "I could of, should of, or would of."
Check out our charts and see if you are able to withstand the volatility between the trigger dates through today's date. The gyrations in price movement are what you will need to withstand and endure to reach the posted returns. Additionally, if the MTG Stop (S1) is hit, position size most likely will be reduced to lower risk exposure or to lock in partial gains.
Bond ETFs rallied and the Corporate Bonds (LQD) is the most recent addition to the "ascending trend" list.
The International sector did not dodge the pelting dealt to our domestic markets. India (INP) is the lone ETF remaining in the "ascending trend" list. Several international ETFs are showing double-digit gains on the short side within just a month or two of triggering to the descending trend.
Alert of imminent reversal to the upside:Click to receive your free 1-month trial to the ETF Trend Tracker (limit one free trial per household), which will be e-mailed to you every week, along with intra-week updates on an as-needed basis.
The Morpheus Trading Group web site has just been updated to show several live seminars in which Deron Wagner will be participating in the beginning of 2008. The highlight of these events is the Live ETF Trading Seminar in Fort Lauderdale, Florida on February 9. Hurry, there is little time left to register! For those of you who prefer the north, Wagner will be presenting at the New York International Traders Expo. less than two weeks later. For details of these and other upcoming events, please visit the Upcoming Trading Seminars web page.