Big volume breakout in crude oil ETF ($USO)

market timing model: Neutral

Current signal generated on close of August 15.

Portfolio long exposure can be anywhere from 30%-50% if you just joined the letter, or up to 100% (if your stocks are holding up).

Past signals:

    • Buy signal generated on close of July 11
    • Neutral signal generated on close of July 5
    • Sell signal generated on close of June 24

(click here for more details)

today’s watchlist (potential trade entries):

$todays watchlist

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open positions:

Below is an overview of all open positions, as well as a report on all positions that were closed only since the previous day’s newsletter. Changes to open positions since the previous report are listed in pink shaded cells below. Be sure to read the Wagner Daily subscriber guide for important, automatic rules on trade entries and exits. Click here to learn the best way to calculate your share size.
$todays watchlist

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closed positions:

open position summary

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ETF position notes:

  • $FDN stop triggered locking in a 6% gain. $SMH sell stop triggered for a 6% loss. Please note that we are basically buying USO on the open as long as the open is less than or equal to 39.45.

stock position notes:

  • $BWEN stop triggered and we are out with a 17% gain. $SYNA and $ATHN both stopped out with losses of 5.7% and 6.2%.

ETF, stock, and broad market commentary:

It was a rough day on Wall Street for the bulls yesterday, as the main stock market indexes plunged across the board. Tumbling 2.2%, the NASDAQ Composite suffered the worst loss. The S&P 500 and Dow Jones fell 1.6% and 1.1% respectively. Volume surged sharply higher across the board, which clearly pointed to heavy selling among banks, mutual funds, hedge funds, and other institutional players.

As you may recall from our analysis in the August 19 issue of The Wagner Daily, we have been bullish on both Oil and Silver ETFs (and, to a lesser degree, Gold) for the past week.

Yesterday, that patience paid off because $USO (crude oil ETF) convincingly broke out above key resistance of an 8-week base of consolidation. Take a look:

$USO Breakout

Not surprisingly, yesterday’s heavy selling in the market caused several of our individual stock positions to hit their stops. However, after yesterday’s 2.4% gain, our current position in $USO is now showing an unrealized share price gain of nearly 8% since our buy entry. Also, the position in our leveraged Silver ETF ($AGQ) is now up approximately 10% since our August 21 buy entry.

When the broad market is down sharply, as it was yesterday, the benefits of trading ETFs (as opposed to only stocks) really become clear.

Unlike stocks, most of which are correlated to the direction of the broad market, ETFs enables traders and investors to still profit in a down market because many types of ETFs have low to zero correlation to the overall stock market direction.

Commodity ETFs such as $USO and $AGQ are two great examples of the above.

We have mentioned several times recently that the NASDAQ has been the lone holdout in the broad market, in terms of holding above its 50-day moving average. Even with yesterday’s sharp losses, the index is still above this important level of support (but now within 1% of it). This is shown below on the daily chart of PowerShares QQQ Trust ($QQQ), a popular ETF proxy for the Nasdaq 100 Index (which has a similar chart pattern to the NASDAQ Composite):

$QQQ pulling back in to support

Despite yesterday’s swift drop that caused $QQQ to break support of its prior swing lows from last week, notice the index is now less than 1% above a major level of horizontal price support that was formed by the prior highs of May, the lows of mid-July, and the 50-day moving average.

Conversely, the S&P 500 is now trading firmly below its 50-day moving average. As you can see on the chart of S&P 500 SPDR ($SPY) below, the benchmark S&P 500 is technically in much worse shape than the NASDAQ:

$SPY breakdown below 50ma

Before yesterday’s decline, $SPY had managed to reclaim support of its 50-day moving average. However, the index only managed to hold above that pivotal level for two days before falling back down (in a big way). The Dow Jones is in even worse shape because the index is already testing crucial support of its June 2013 lows. By comparison, notice how far above their respective June lows both the NASDAQ and S&P 500 remain.

For now, our market timing system remains in “neutral” mode. The only reason it has NOT yet shifted to “sell” mode is because the NASDAQ continues to hold above key, intermediate-term support of its 50-day moving average.

Nevertheless, if the NASDAQ joins the S&P 500 and Dow Jones Industrial Average in breaking down below its 50-day moving average as well, there would no longer be any reason to be on the long side of the market (with the exception of ETFs with low correlation to stock market direction).

Because we are trend traders, a shift to “sell” mode would also enable us to start selling short (stocks with relative weakness) and/or maintain a heavy cash position. All bets for individual stocks on the long side of the market would be off.

With most indices breaking down below the 50-day MA, we see no reason to add more long exposure. The quick stop out in $SYNA yesterday is a good example of what can happen to a decent setup when conditions are not ideal, which is why we took partial size.

Let’s see how our existing positions hold up through the rest of the week. We may have a few that stop out and a few that surprise us with their relative strength.

As far as stocks to keep on our radar, $CBI is currently consolidating in a tight range on the weekly chart, just below all-time highs. Note that the price action is setting higher swing lows within the base, which is a bullish sign, especially when the market averages are breaking down below swing lows.

$CBI Bullish consolidation

The monthly chart below shows $CBI consolidating just below the highs of 2007. $CBI is not ready to launch right now, but it will remain on our internal watchlist as a potential buy setup when market conditions settle down.

$CBI breakout to new highs

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