Waiting for a bounce to short Agriculture ETF (DBA)


Stocks followed through on Friday’s tumble and for the second consecutive day technology and leadership stocks got hit hard. By the closing bell all five major indices were trading near session lows. For the second day in a row the small-cap Russell 2000 led the decline. This index fell 1.7% during the session but was trading down another .3% after the close. The Nasdaq and the S&P MidCap 400 were also pummeled as they lost 1.6% and 1.0% respectively. The Dow Jones Industrial Average dropped 0.4% while the S&P 500 shed 0.6%. The fact that the DJIA and the S&P 500 have held up comparatively well over the past two sessions suggests that money may be seeking refuge in large cap dividend performers.

Although not overwhelmingly negative, when taken in context of the number of distribution days that have occurred in the market over the past month, Monday’s internals still suggest the market is weakening and a significant selloff could be at hand. Another distribution day was not what the market needed. Declining volume outpaced advancing volume across the board. The ratio of declining to advancing volume ended the day at 2 to 1 on NYSE and 3.5 to 1 on the Nasdaq. Assisted by a late day surge, volume closed up on both exchanges. While the Nasdaq saw trade increase by over 7%, turnover on the NYSE was only modestly higher. Still, the volume was high enough to classify Monday as a distribution day on Wall Street. Monday’s bearish price action would appropriately be classified as both a bearish follow through day and as a distribution day among institutional investors.

Near the close yesterday we sent an alert that we were exiting SLV despite the fact that it had not hit its stop. We decided to impose a time stop due to the weakness in the broad market. Further, we viewed SLV as a quick momentum reversal trade and we did not like the fact that it failed to follow through relatively quickly. Our short position in EWJ continued to act well yesterday and we anticipate further deterioration in this ETF over the next several days.

Our watchlist candidate IWM hit its short trigger yesterday and we entered the trade. In yesterday’s newsletter we stated, “Due to the relative weakness being exhibited by the iShares Russell 2000 Index ETF (IWM) we are placing it on the watchlist as a possible short candidate. Should the market turn lower over the next several days, IWM will likely drop the hardest due to its recent lack of strength compared to the broad market. Further, this ETF is trading below its trendline and a move below the two day low of $82.98 would result in a loss of support of the 50-day MA“. Yesterday IWM continued to exhibit relative weakness as it dropped the most (2.1%) of any of the major indices.

Below are charts of the Nasdaq, S&P 500 and the Russell 2000 (IWM). A quick comparison of these charts to the same charts presented in Monday’s newsletter shows the swift deterioration in the market yesterday. At the closing bell on Friday, the Nasdaq was showing relative strength to the broad market (Compared to S&P 500). However, by the close of business yesterday, the Nasdaq was showing relative weakness to the broad market. The Nasdaq is now resting on its 50-day MA while the S&P 500 is approximately 0.5% above this key market. The IWM has clearly lost support of its 50-day MA and is now poised for further downside.

The PowerShares DB Agriculture ETF (DBA) has been under significant selling pressure since late April. Further, over the past two weeks it has clearly demonstrated relative weakness to the broad market as it has traded below the 20 and 50 day moving averages. This ETF would likely provide an ideal shorting opportunity with a move back above the two day high of $32.57. Typically, a “shakeout” move like this is needed prior to a possible move lower. The obvious entry would be a drop below the three day low but the market generally doesn’t reward the “obvious”. Nonetheless, an abrupt move below $32.00 could provide an alternative short trigger but the risk/reward of the trade improves dramatically with a bounce into the 20-day EMA.

With yesterday’s selloff the health of the market is now in question. Internals are deteriorating. Over the past twenty sessions the market has seen at least 5 distribution days and arguably a sixth. Further, for the second time in as many days, leadership stocks got hit hard. Leaders such as GOOG, BIDU, AAPL, PCLN, NFLX and AMZN showed relative weakness as they plunged by 2.1%, 2.1%, and 2.2%, 3.7%, 3.8%, 4.3% and 5.2% respectively. That many distribution days in such a short period of time generally leads to an abrupt round of selling. By no means are we calling a top. Rather, we believe that caution is warranted on the long side of the market at this time and that the odds may favor short setups and sitting in cash.

Today’s Watchlist:


Shares = 400
Trigger = 25.89
Stop = 24.91
Target = New highs
Dividend Date = n/a

Notes = See commentary from Arpil 13th report

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

    position summary

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  • Per intraday alert, we sold SLV late in the day to limit our losses. IWM short setup triggered.

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      Edited by Deron Wagner,
      MTG Founder and
      Head Trader