2 long and 1 short ETF positions

As expected, stocks chopped around in
an indecisive fashion on the last day of October before again closing near the
flat line. After oscillating on both sides of unchanged throughout
the session, the Nasdaq Composite gained 0.1%, the Dow Jones Industrial Average
lost 0.1%, and the S&P 500 finished flat. Small and mid-caps showed relative
weakness, as the Russell 2000 and S&P Midcap 400 indices both fell 0.5%. Each of
the major indices closed near the middle of their intraday ranges, indicative of
a tug-of-war between the bulls and bears.

Breaking the trend of declining volume in the previous two
sessions, turnover surged higher across the board yesterday. Total volume in the
NYSE spiked 23% higher than the previous day’s level, while volume in the Nasdaq
increased by 13%. Given that the S&P, Nasdaq, and Dow were each within 0.1% of
unchanged, yesterday’s higher volume pointed to a bit of “churning” beneath the
surface. “Churning” occurs when overall volume increases substantially, but
prices don’t. If this occurs near the lower channel of a downtrend, it is often
bullish because it indicates institutions are scooping up shares while the bears
are trying to drive stocks lower. Conversely, “churning” near the upper channel
of an uptrend is usually a bearish sign of institutional selling into strength.
This, of course, doesn’t necessarily mean that stocks will suddenly fall from
here, but astute traders should proceed on the long side with caution in the
short-term.

Upon observing yesterday’s intraday price action of the Oil
Service HOLDR
(
OIH |
Quote |
Chart |
News |
PowerRating), we noticed a technical event that would provide a good
mini-lesson in today’s commentary. When trading stocks or ETFs with an expected
holding time of one to three weeks, we like to use the 120-minute chart interval
for setting stops. Specifically, one of the simplest and effective methods is to
simply draw a trendline connecting the lows (for an uptrend) or highs (for a
downtrend) over a period of weeks. One can then trail a stop just below or above
support of said trendline. On the surface, this is a basic technical analysis
concept that you may already know, but the important detail that most traders
miss is the “wiggle room” required in order to withstand the inevitable “stop
hunts” below the trendline.

Throughout my early years of being a novice trader, one of the
biggest problems I had was being stopped out of a stock, only to watch it
reverse back in the right direction only pennies below my stop. Eventually, I
figured out why this was happening. The problem was that I was placing my stops
at the same level as all the other traders. My stop was too obvious! Because
specialists and market makers knew where the majority of stops were residing,
they were making sure that every test of trendline support resulted in a quick
probe below those stops. Then, they could accumulate shares of the stock before
continuing the primary trend. After years of frustration from losing money in
this manner, I learned to give my stops enough “wiggle room” below the obvious
trendline support where all the other traders had placed their stops. Years
later, I now know my stops are in the right place when the position I am in
reverses just before hitting my stop. This is exactly what happened in OIH
yesterday:

When we originally bought OIH as it broke out above the 50-day
MA on October 19, our original stop was 126.58. On October 26, after OIH had
rallied to an unrealized gain of six points, we moved the stop up to break-even
(131.65) in order to remove all the risk from the trade. Our mistake in doing
so, however, was that we initially failed to realize that a break-even stop of
131.65 coincided exactly with support of the hourly uptrend line that had
formed. So, on October 30 we sent an intraday e-mail alert to subscribers,
informing them that we were adjusting our stop a bit lower, down to 130.30,
because we needed to give OIH a bit of “wiggle room” below the trendline
support. As you can see, it’s a good thing we did because OIH dipped below
trendline support yesterday, just missed our adjusted stop of 130.30, then
reversed sharply higher into the close. Assuming the uptrend continues, OIH
should now go on to form another “higher high” above the October 26 high.

Lowering a protective stop on a long position is usually not a
very good idea, but it’s something that we do a few times per year. When we
realize we have made a mistake by placing too tight of a stop, we have no
problem with giving the ETF a little more “wiggle room” that a slightly looser
stop affords, just as long as our maximum capital risk per trade is not
violated. Because we had already raised the stop up to breakeven, lowering it
slightly below that level meant that our maximum capital risk was still minimal
if we stopped out. If you’re a trend trader, an easy rule of thumb in setting
stops is to ask yourself, “Is my stop placement too obvious?” If it is, you can
be assured that you will be stopped out, only to watch the stock or ETF reverse
back in the right direction. It’s always better to have smaller share size and
the proper stop, rather than trying to hit a homerun with large share size, but
being required to have a really tight stop in order to do so.

As for the broad market, we expect more chop and indecision in
the coming days. After drifting down towards the middle of their uptrend
channels, we can no longer say that the major indices are “overbought,” but this
does not mean they can’t continue to correct. Remember that the 20-day MA is the
first significant support level for the S&P, Nasdaq, and Dow, so there’s a good
chance the indices will at least test that level before staging their next rally
attempt to the upside. Sectors with relative strength that trade independently
of the broad market, such as Gold and Oil, are probably your best bets for now.
Most of the currency ETFs that we discussed in yesterday’s newsletter also moved
higher and are breaking out or about to break out soon (such as FXE).

Open ETF positions:

Long
(
GLD |
Quote |
Chart |
News |
PowerRating) and
(
OIH |
Quote |
Chart |
News |
PowerRating), short
(
SMH |
Quote |
Chart |
News |
PowerRating) (regular
subscribers to

The Wagner Daily receive detailed stop and target prices on open
positions and detailed setup information on new ETF trade entry prices. Intraday
e-mail alerts are also sent as needed.)