Commentary:
Yesterday was a session of broad market divergence, as small-cap and tech stocks sunk deeper into the red, but most of the major indices were little changed. The Nasdaq Composite and Russell 2000 fell 0.9% and 0.8% respectively, while the S&P 500 and Dow Jones Industrial Average both finished flat. The S&P Midcap 400 slipped 0.1%. After oscillating in a tight, sideways range throughout the day, the S&P 500 and Dow Jones Industrials settled in the bottom third of their intraday ranges. The Nasdaq Composite closed at its worst level of the day.
Turnover backed off substantially from last Friday’s brisk pace. Total volume in the NYSE declined 33% below the previous day’s level. Volume in the Nasdaq eased 28%. The sharp decrease in trading was not surprising, as the previous day’s volume levels were inflated by the quarterly expiration of stock index futures, stock index options, stock options, and single stock futures. It’s also common for volume to recede after a highly volatile move such as last Friday’s sell-off. Despite unchanged closing prices in the S&P and Dow, declining volume in the NYSE still exceeded declining volume by a ratio of approximately 2 to 1. The Nasdaq adv/dec volume ratio was negative by nearly 4 to 1.
The U.S. Oil Fund (USO), which roughly moves in sync with the price of crude oil futures, has been consolidating at its all-time high for the past two weeks. As long as the consolidation remains intact, one could expect an eventual breakout to another fresh high. But not feeling the need to wait for a new high in the price of crude oil, the Oil Services HOLDR (OIH) rocketed 4.8% higher and closed at a record high yesterday. On the daily chart below, notice the clean breakout above resistance of the $221 level:
Since OIH has firmly broken out to a new high, it can be bought on any slight pullback. Nevertheless, we think the best way to trade OIH is strictly on an intraday basis. Increasing retail speculation in the price of crude oil has caused most of the oil-related ETFs to become whippy and indecisive from day-to-day. Even though OIH has broken out, a large opening gap down would not be overly surprising. Trading OIH strictly on an intraday basis is the easiest way to eliminate the worry about unpredictable overnight gaps.
Speaking of unpredictable overnight gaps, spastic behavior in the precious metals ETFs continues to reign supreme. Within the past two months, we have bought iShares Silver Trust (SLV) on three different occasions. Each entry was taken after SLV broke out above its intermediate-term downtrend line and 50-day moving average. Because it has been in a long-term uptrend, our expectation after the buy entry has been a resumption of the dominant trend. Still, regardless of how good each of those breakout entries looked at the time, SLV gapped down sharply a few days later and stopped us out each time. This most recently occurred yesterday.
We most recently bought SLV on June 16, after it gapped up more than 5% and broke out above its 50-day MA that morning. SLV pulled back slightly the following morning, but moved above the high of its June 16 breakout day two sessions later. On June 19 and 20, SLV began consolidating in a tight range, above prior resistance of its intermediate-term downtrend line. Because SLV actually held and consolidated above its downtrend line this time around, we were confidently expecting a nice gap up to start this week, followed by another leg higher. Instead, SLV fooled us once again by gapping down 4.1% and stopping us out yesterday. As you might have noticed, trading in StreetTRACKS Gold Trust (GLD) hasn’t been any better. On the chart below, the most recent failed breakout attempt in SLV is circled in pink, while previous failed breakouts are circled in blue. Chop suey!
One could pontificate on the myriad of possible reasons the precious metals ETFs keep failing their breakouts, but the reality is the “why” really doesn’t matter. The simple fact is both SLV and GLD have been unable to sustain numerous breakout attempts in recent months. That’s all that matters to our bottom line.
Although we typically enjoy analyzing and discussing our successful, profitable trades in this newsletter, we’re never afraid to talk about trades that didn’t work, especially when there are educational lessons to be learned. In this case, the lesson is that some trades will simply not work, no matter how solid the technical setup. Professional traders take their licks and move on to the next trade, realizing that consistently profitable trading is merely a numbers game. As such, it’s inevitable that the law of averages will occasionally work against us. Amateur traders, on the other hand, whine about their losses and look for every reason under the sun that the trade didn’t work.
Going into yesterday morning, the Nasdaq was showing relative strength to the S&P 500 and Dow Industrials by holding above its near-term low from June 11. However, the Nasdaq began to play “catch up” to the weakness in the S&P and Dow by following suit to close at a new June low. That break of support caused the Nasdaq to form a “lower low,” which is shown on the daily chart below:
The Nasdaq has now formed two significant “lower lows” and one “lower high” on its daily chart (circled in pink), shifting the index more towards a confirmed intermediate-term downtrend. However, note that yesterday’s breach of support was not by a very wide margin. As such, the index could still attempt to snap back to the upside after undercutting its prior low. A significantly lower closing price in today’s session would confirm the formation of a “lower low.” No changes to the primary downtrends of the S&P and Dow.
Today’s Watchlist:
There are no new setups in the pre-market today. As always, we will promptly send an Intraday Trade Alert if/when we enter anything new.
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:
-
Open positions (coming into today):
- The opening gap down in SLV mandated the use of the MTG Opening Gap Rules to adjust the stop. SLV subsequently hit the stop below the 20-minute low.
- Choppy and erratic market conditions have caused us to stop out of a string of ETF trades in recent weeks. However, it wasn’t the first time this has happened over the years, and certainly won’t be the last. The reason this newsletter has consistently outperformed the main stock market indexes in its six year history is because we stick to our strategy and stay the course through thick and thin. Frankly, we’re not concerned about the last few losing trades, but we’ll be reducing our capital risk by lowering share size on new trades until the law of averages swings back in our favor. Onward and upwards we go. . .
-
SLX short (150 shares from June 20 entry) – sold short 105.52, stop 109.32, target 91.18, unrealized points = (0.31), unrealized P/L = ($46)
RSX long (400 shares from June 13 entry) – bought 55.55, stop 54.22, target new high (will trail stop), unrealized points = (0.73), unrealized P/L = ($292)
Closed positions (since last report):
-
SLV long (150 shares from June 16 entry) – bought 170.72, sold 164.51, points = (6.21), net P/L = ($934)
Current equity exposure ($100,000 max. buying power):
- $37,802
Notes:
Edited by Deron Wagner,
MTG Founder and
Head Trader