As was the situation at the beginning of this month, the S&P 500 again reversed lower after testing resistance of its 20-day exponential moving average last Thursday. This is shown on the daily chart below:
Along with the S&P 500, both the Nasdaq and Dow also reversed after testing their 20-day EMAs Thursday. In strongly uptrending markets, the 20-day EMA often acts as the first line of defense to provide substantial price support and enable a resumption of the primary uptrend. Not surprisingly, the opposite is also true in downtrends. Many investors sell into resistance of the 20-day EMAs in bear markets, while traders also use that level as a low-risk entry point on the short side. If the S&P happens to pop above yesterday's high and close above its 20-day EMA, it would be a rather bullish signal for the overall market. However, unless that happens, we must assume the index will resume its long-term downtrend that has been in effect since last October. One could reasonably expect a test of the February lows, and perhaps even the January lows, sometime next week.
Recently, we discussed the importance of monitoring the 200-day moving average as an indicator of long-term support and resistance on various indexes. Though the daily time frame is the one most casual chartists follow, we know that the 200-period moving average just as accurately acts as support and resistance on shorter-term intraday charts. The 15-minute intraday chart of the popular Nasdaq 100 Index Tracking Stock (QQQQ) on February 11 and 12 is a good example of this. On the chart below, we have removed the other moving averages so that you can more easily see the 200-MA:
On February 11, notice how the 200-MA acted as overhead resistance that prevented QQQQ from moving higher. Then, after it gapped open above that level of resistance, it became the new support in the February 12 session. At mid-day, and several times thereafter in the afternoon, QQQQ bounced off the 200-MA before eventually plunging below it during the final hour of trading. Notice how quickly QQQQ dropped after finally breaking its 200-MA. When analyzing intraday charts, remember this example because it happens time and time again. Rarely will an index, stock, or ETF slice through its 200-day MA, on any major time frame, without first bouncing off it a few times. More importantly, the most basic tenet of technical analysis is that a prior level of support becomes the new resistance after the support is broken (and vice versa).
Currently, we have four open positions. Our long entries from February 8, the DB Commodity Index Fund (DBC) and U.S. Natural Gas Fund (UNG) both cruised higher last week. DBC set a new all-time high, while UNG moved above its recent highs. Both closed at their intraday highs as well. We'll continue to trail a stop on both positions in order to maximize profits. Thursday afternoon, we entered two new positions as well: UltraShort S&P 500 ProShares (SDS) and UltraShort Financials ProShares (SKF).
In the February 14 issue of The Wagner Daily, we said that "Because the market's recent gains have lacked the confirmation of accumulation by mutual, hedge, and pension funds, this week's rally remains highly suspect. When a market rallies on lighter than average volume, it only takes one day of institutional selling to wipe out many days of gains. With the stock market clearly stuck in an overall downtrend, there are pretty good odds of another day of institutional selling coming along shortly." The bearish price action that followed in Thursday's session was a clear example of this. Only the Nasdaq sold off on higher volume, but notice it didn't take a lot of selling pressure in the overall market to wipe out the prior day's significant gains.
Although short-term bounces can certainly be played along the way, the market has not yet given us any clear signs that the worst is behind us. Until we begin seeing the necessary support of institutional buying, along with the breaks of key resistance levels, it remains a risky proposition to be heavily on the long side of the market within the context of both intermediate and long-term downtrends. It may be a corny and worn-out Wall Street cliche, but it will serve you well to remember that the trend really is your friend!
For those of you heading to the New York Trader's Expo this weekend, I look forward to meeting you after my Monday presentation on ETF trading.
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.
The stock market is off to a rough start so far this year, but we're pleased to report that January was a very profitable month for the ETF trade picks from The Wagner Daily newsletter. Last month, the S&P 500 tumbled 6.1%, but our ETF picks netted a total gain of 14.8% (based on the model trading account). This represents a relative outperformance of the S&P 500 by more than 20% in a single month!
Last month's diverse mix of long and short ETF positions with relative strength and weakness to the broad market enabled The Wagner Daily to continue its winnning streak. From the end of June 2007 through the end of January 2008, the model account of The Wagner Daily ETF picks gained nearly 50%. The benchmark S&P 500 lost more than 8% during this same period. After a bit of underperformance in 2006, The Wagner Daily's performance stats have been stronger than ever for the past seven months. To view detailed trade results for any quarter of the past five years, please click here. A cumulative graph of MTG's relative performance to the S&P 500 is also displayed on that page.
The MTG Stalk Sheet, the sister newsletter of The Wagner Daily that focuses on individual stocks rather than ETFs, did not fare quite as well last month. Still, the stock picks cumulatively lost just 0.9% last month. Again, this compares quite favorably to the 6.1% loss in the S&P 500. Despite a relatively flat month, the recent trade performance of the MTG Stalk Sheet remains impressive. For the last seven months, the model account has still realized a gain of more than 24%. Because it's more active than The Wagner Daily with the quantity of trade entries, the MTG Stalk Sheet performance results have a low month-to-month correlation with The Wagner Daily. Nevertheless, the long-term annualized gains of both services are within just a few percentage points of one another. Cumulative performance results of the MTG Stalk Sheet can be viewed by clicking here.
Morpheus Trading Group is proud to be among the few newsletter services that has freely displayed performance stats through both good times and bad over the years. Successful trading is not about getting rich quick. Rather, we focus on consistently hitting singles and doubles, with just the occassional triples and homeruns. If you want excitement and andrenalin, go to Vegas. But if consistent long-term profits in both up and down markets are your goal, we're confident the services of Morpheus Trading Group are a match with your needs.
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 bears regained their footing and took the Markets lower for the week. The fall did pause a bit, but the signals are mixed to start the new week. The Dow 30 (DIA) posted the lowest close of the week, while the Nasdaq 100 (QQQQ) posted an “inside” day after testing new lows. An inside day occurs when the intraday range is completely contained within the high and low of the previous day.
Due to continued high volatility in the markets, it is critical to keep your stops continually updated, both the MTG Stop (S1) and the Reversal Stop (S2). Large percentage moves are becoming the norm these days. Also, be aware that values in the “Midtrend S1% Risk” data column have progressively expanded. This means one will assume more risk if initiating new positions. This can be mitigated by reducing position size according to your own tolerance levels and trading plan.
Not many bright spots in the Industry sector list, except that the Internets (HHH) held its gains from the prior week. The Dow Transportation Index (IYT) is also holding up well, after checking into the “ascending trend” the previous week. Several MTG Stops (S1) have been squeezed tighter, and gains made in the descending trend are now more “realizable.” If you close them out tomorrow, several ETFs from the November 2007 transitional time frame now have gains over 10%. The Pharmaceutical HOLDR (PPH) looks especially weak after posting the lowest close of its current descending trend. On the flip side, the Commodities index (DBC) posted new highs, so we have raised our stops. We also bought DBC as a position in the Wagner Daily newsletter on Friday. Close to new recent highs are: Gold (GLD), Silver (SLV), and Natural Gas (UNG). Midtrend entries at these technical levels are a great way to participate in a trend.
The fixed-income (bond) ETFs felt some pressure to the downside last week, but did not develop any significant technical signals to deviate from their current ascending trends. The Corporate Bonds (LQD) remains the weakest and has yet to resolve itself in a long-term directional pattern.
The International sectors developed weaker patterns and fell to near their January lows. Hong Kong (EWH) posted new lows, while other Asian counterparts are hovering near their lows. Prices may begin to fill their “gaps” from the extreme moves many of these ETFs made in January. We will monitor the trading patterns very carefully as we approach the tests of new lows.
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.