On Tuesday, the major indices were poised for a rally by gapping up above key resistance levels, but they promptly sold off and closed in the red. Yesterday's action was the opposite. Stocks opened weak, below pivotal support levels, but reversed to finish the day higher. The Dow Jones Industrial Average rallied 0.7%, the S&P 500 0.8%, and the Nasdaq Composite 0.9%. Mid-cap stocks showed relative strength for a change, enabling the S&P Midcap 400 Index to advance 1.4%. The small-cap Russell 2000 was higher by 1.1%. All the main stock market indexes finished near their intraday highs, just as they settled near their intraday lows in Tuesday's session.
Perhaps the most notable element of yesterday's session is that the gains occurred on higher volume. Total volume in the Nasdaq rose 18% above the previous day's level, while volume in the Nasdaq ticked 4% higher. The gains on higher volume enabled both the S&P and Nasdaq to score a rare "accumulation day," indicative of institutional buying. Turnover in the Nasdaq moved back above average levels for the first time in weeks. NYSE trading remained below its 50-day average level.
It certainly has been choppy over the past several days, but we warned that indecision is common when the major indices are forming a tightening "wedge" pattern on their daily charts. Just as traders were faked out by Tuesday's opening gap above the "upper channel" resistance that failed to hold, many were equally sucked in to the bearish side of the market with yesterday's opening gap down.
Because of such indecision over the past several days, we made a judgement call yesterday morning to significantly tighten the stops in both the UltraShort S&P 500 ProShares (SDS) and UltraShort Financials ProShares (SKF) when the broad market began to reverse its opening weakness. Fortunately, this enabled us to promptly "scratch" both trades when they moved above our daily downtrend lines. We expected downside resolution of the "wedge" pattern, but it may not happen yet. On both sides of the market, erring to the cautious side in the current market environment is clearly the safest bet.
Though we broke even on both SDS and SKF, we sold our long position in the U.S. Natural Gas Fund (UNG) for a gain of nearly 10% since our entry on February 8. Like many of the commodity ETFs, UNG has seen strong upward momentum over the past week. Still, resistance of its prior high from November 1 provided a logical point to take our profit by selling into strength of the opening gap. This enabled us to exit near yesterday's high, rather than trailing a stop and risking sitting through a pullback:
Just as we have successfully done on numerous occassions since the broad market's downtrend began last October, we have no problem with jumping back on the long side of the market and profiting from momentum of countertrend bounces. However, we first want some proof that the market has made up its mind in the near-term. Specifically, we are looking for firm closing prices above the February 13 highs (to buy) or below yesterday's lows (to sell short) on charts of the major indices. For maximum simplicity and accuracy, simply draw a rectangular box around the recent range of the S&P 500, as we have done on the daily chart below:
Failing to wait for confirmed closing prices above or below these pivotal levels before buying new positions could easily lead to churning one's account. Based on what the market has shown us so far this week, one must be cognizant of the risk of overtrading without the market first confirming the direction of its next move. We're now flat because we obviously want to avoid that. As soon as we regain confidence that the choppy, sloppy times have passed, we'll be ready to jump back in the market in the direction of the near-term trend. Remember that profesional traders always trade what they see, not what they think!
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.
Our seminar entitled Relative Strength Trading with ETFs, delivered by Deron Wagner at this week's New York Traders Expo, was quite a successful event! The presentation was standing room only, as more than 120 attendees packed the workshop room. We appreciated the extensive enthusiasm and feedback received from everyone, and it was great meeting many of our subscribers face to face. As a bonus, MTG sponsored a special cocktail hour after the seminar. Approximately 40 people came to informally chat with Deron in the Marriott's lounge overlooking Times Square.
If you missed this exciting event, don't fret. MTG has future live seminars and events scheduled throughout this year, in various cities around the country. Details will appear in this Wagner Weekly column as they become available.
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:Most of the Market Segment ETFs formed “swing high” patterns last week, clearly defining short-term their short-term resistance levels. Note that the “swing highs” were lower than the February 1 highs. Therefore, a break to “lower lows,” below the February 7 lows, would change the short-term trends to down as well. With at least two “swing highs” above current levels, it will take some strong institutional buying to breakout above those resistance levels. Conversely, a breakdown below the February 7 lows provides low-risk re-entries on the short side of the market. You may have noticed that the February 7 lows are higher than the big lows from mid-January. This pattern is forming a “triangular wedge,” a contraction of price range over time that will resolve itself in one direction or the other. Typically, this type of consolidation resolves itself in the direction of the dominant trend, which is down in this case.
Some Industries rallied well enough to land on the “ascending trend” list, but only US Oil (USO) showed signs of continuation through its trigger price. Check out the other annotated charts in this week's updated ETF Trend Tracker report. The Financials (XLF) continue to weaken and will be testing support near the $25.50 area. The Commodity index (DBC) and US Natural Gas (UNG), both of which were purchased in The Wagner Daily last week, hit new highs. However, Gold (GLD) has completed the right shoulder of a head and shoulders pattern. Upon recognition of a topping pattern such as the “head and shoulders,” one should consider lightening up on share size and tightening stops. Another way to look at it is evaluating the risk-reward of your position. Market tops offer price resistance and will limit your reward to the upside. If the risk to reward does not make sense, then it’s time to stand on the sidelines and wait for more favorable conditions.
The Bond market generally declined for the week. The short-term bonds (SHY) held up best and consolidated near the highs. The long-term bonds, on the other hand, broke below the lower trend channel and will be testing the Reversal trigger (S2) next week. The mid-term bonds (IEF) remain in the lower half of its month-long consolidation range.
The International sectors were mixed. Some of the Asian ETFs rallied to break above their upper trend channels. Check out Singapore (EWS) and Taiwan (EWT). China (FXI) staged a rally, bouncing from the multi-lows posted in the last month. India (INP) completed a “swing low” formation and is approaching the trigger level to re-enter an ascending trend. Brazil (EWZ) is looking to test the Reversal trigger next week.
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 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.