September 22, 2010
As most economists expected, the Fed left rates unchanged in yesterday afternoon's announcement, and said they stood ready to provide "additional accommodation" if necessary. This caused the stock market to undergo its usual post-Fed volatility in the afternoon before finishing with mixed results. The Dow Jones Industrial Average eked out a gain of 0.1%, but both the S&P 500 and Nasdaq Composite declined 0.3%. The small-cap Russell 2000 and S&P MidCap 400 indices lost 0.8% and 0.6% respectively. Because of a sharp spike higher immediately following the Fed announcement, which subsequently faded, all the main stock market indexes closed in the bottom third of their intraday ranges.
Total volume in the NYSE rose 10% above the previous day's level, while turnover to Nasdaq ticked 5% higher. The higher volume losses of the S&P 500 and Nasdaq Composite caused both indexes to register a bearish "distribution day," indicative of institutional selling. But after nine straight days of gains, a round of profit taking by the bulls was not shocking. Typically, a healthy market can digest one or two "distribution days" within a short period of time, without correcting sharply. Nevertheless, we will be on the lookout for more instances of selling amongst mutual funds, hedge funds, and other institutions.
Since our entry into iShares Emerging Markets Bond Fund (NYSEARCA:EMB) on September 13, the ETF has traded in a tight, sideways range. However, the recent price consolidation of EMB has enabled the 50-day moving average to rise up and provide support just below the short-term range. As such, it now appears as though EMB is poised to break out above the highs of its consolidation, and resume its dominant uptrend. This is shown on the annotated daily chart of EMB below:
Although we are already long EMB, traders who missed our initial entry point could find a valid buy point above the September 16 high of $109.82 (marked by the dotted horizontal line on the chart above). Since yesterday's closing price was $109.61, there is a good chance EMB will move above that price in today's session, thereby confirming a move back above its 20-day exponential moving average as well. As a bonus, remember that EMB also pays a substantial monthly dividend. On September 1, for example, EMB distributed a dividend of $0.44 per share.
On September 20, just two days ago, both the S&P 500 and Nasdaq Composite broke out above the highs of their respective four-month trading ranges. While this is a positive sign for the broad market, it's notable that both indexes experienced a bout of distribution just one day later. If the stock market is to follow a common pattern of recent months, we could easily see both indexes fail their recent breakouts by sliding back into their previous trading ranges. Frankly, a substantial retracement from current prices would be healthy for the market, and would provide us with much lower risk pullback entry points on strong ETFs that have been racing higher (such as several emerging markets ETFs). We have been maintaining a watchlist of ETFs with relative strength, and are actively monitoring these for decent price retracements. We will point out these setups in The Wagner Daily as they present themselves.
While the initial, knee-jerk reaction to yesterday's Fed announcement was relatively muted, we typically do not see the real reaction to FOMC meetings until one to two days later. As such, traders should be prepared for a bit of volatility over the next several days, as institutions digest the implications of the details from yesterday's announcement. Since the stock market has a way of doing the opposite of what people expect, whenever the most number of participants expect it, we would not be surprised to see an initial failure of the S&P and Nasdaq's obvious breakout levels from two days ago. At the least, one should be prepared for a period of price consolidation ("correction by time") for at least a week or two.
If EMB breaks out above the high of its recent consolidation, as discussed above, we plan to add shares to our existing position. We will automatically buy 100 more shares of EMB if it trades above a trigger price of $109.88. As per the open position detail below, we have also raised the stop slightly, in order to reduce capital risk if the additional shares trigger.
Daily Performance Report:
Below is an overview of all open positions, as well as a performance report on all positions that were closed only since the previous day's newsletter. Net P/L figures are based on the $50,000 Wagner Daily model account size. Changes to open positions since the previous report are listed in red text below. Please review the Wagner Daily Subscriber Guide for important, automatic rules on trigger and stop prices.
- We have slightly raised the EMB stop. No other changes to existing positions at this time.
- Reminder to subscribers - Intraday Trade Alerts to your e-mail and/or mobile phone are normally only sent to indicate a CHANGE to the pre-market plan that is detailed in each morning's Wagner Daily. We sometimes send a courtesy alert just to confirm action that was already detailed in the pre-market newsletter, but this is not always the case. If no alert is received to the contrary, one should always assume we're honoring all stops and trigger prices listed in each morning's Wagner Daily. But whenever CHANGES to the pre-market stops or trigger prices are necessary, alerts are sent on an AS-NEEDED basis. Just a reminder of the purpose of Intraday Trade Alerts.
- For those of you whose ISPs occasionally deliver your e-mail with a delay, make sure you're signed up to receive our free text message alerts sent to your mobile phone. This provides a great way to have redundancy on all Intraday Trade Alerts. Send your request to email@example.com if not already set up for this value-added feature we provide to subscribers.
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Edited by Deron Wagner,
MTG Founder and Head Trader
DISCLAIMER: There is a risk for substantial losses trading securities and commodities. This material is for information purposes only and should not be construed as an offer or solicitation of an offer to buy or sell any securities. Morpheus Trading, LLC (hereinafter "The Company") is not a licensed broker, broker-dealer, market maker, investment banker, investment advisor, analyst or underwriter. This discussion contains forward-looking statements that involve risks and uncertainties. A stock's actual results could differ materially from descriptions given. The companies discussed in this report have not approved any statements made by The Company. Please consult a broker or financial planner before purchasing or selling any securities discussed in The Wagner Daily (hereinafter "The Newsletter"). The Company has not been compensated by any of the companies listed herein, or by their affiliates, agents, officers or employees for the preparation and distribution of any materials in The Newsletter. The Company and/or its affiliates, officers, directors and employees may or may not buy, sell or have positions in the securities discussed in The Newsletter and may profit in the event the shares of the companies discussed in The Newsletter rise or fall in value. Past performance never guarantees future results.
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