market timing model:

Neutral – Signal generated on the close of August 2 (click here for more details)

today’s watchlist (potential trade entries):

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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. Net P/L figures are based on two separate $50,000 model portfolios (one for ETFs and one for stocks). Changes to open positions since the previous report are listed in red shaded cells below. Be sure to read the Wagner Daily subscriber guide for important, automatic rules on trade entries and exits.

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closed positions:

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ETF position notes:

• UNG hit our trigger price for buy entry and initially surged much higher. At one point during the session, UNG had racked up a 6.0% gain. However, by the closing bell, the encouraging early success of the move had evaporated, leaving UNG with a 0.5% closing loss and at its intraday low. It was a wild ride! Because UNG closed very near our stop price, we have adjusted the stop slightly lower in order to give the play some “wiggle room” on the open and attempt to avert an opening stop run. Due to reduced share size, capital risk still remains much smaller than average for this setup.
• IBB spent yesterday in consolidation mode, as it meandered about its 20-day EMA. It remains on our watchlist with same parameters going into today.

stock position notes:

• Both CBM and EQIX triggered our buy entries from yesterday’s watchlist. Like UNG, CBM initially surged much higher, but reversed to close near our entry point. Lack of follow-through like this, which has been all too prevalent in the market, is one of the reasons our market timing model remains in neutral and our initial risk (adjusted share size) is less than half of normal. No changes to the stops in CBM, EQIX, or ONXX at this time.

ETF and broad market commentary:

For the second day in a row, stocks apathetically oscillated in a narrow, sideways range throughout the day before settling with mixed results on lighter trade. Stocks spent most of the session in slightly positive territory, but were unable to find serious traction at any time during the day. Although the blue chip Dow Jones Industrial Average slipped 0.1% yesterday, the Nasdaq Composite rose 0.3%. The benchmark S&P 500 Index was unchanged, but the S&P Midcap 400 and small-cap Russell 2000 indices gained 0.2% and 0.3% respectively. The slight relative strength in small and mid-cap stocks yesterday was notable because, as we recently wrote about in this blog post, bearish divergence and lack of leadership among small and mid-cap stocks is of the main problems we have been seeing with the current rally in the U.S. markets. In the coming days, we will be monitoring the small and mid-cap indexes closely to see if they continue to outperform the large caps.

Light turnover confirmed yesterday’s overall apathetic mood of the market. Total volume in the Nasdaq eased 10%, while volume in the NYSE was 11% lighter than the previous day’s level. Despite the slower pace of trade, it’s positive that advancing volume held the upper hand over declining volume by a margin of 3 to 2 in the NYSE. The Nasdaq adv/dec volume ratio was nearly the same (1.4 to 1). Since yesterday was essentially a day “consolidation day” for the broad market, the lighter volume across the board was positive because it tells us the bears were not selling into strength of the recent gains. When the stock market is rallying higher, we want to see increasing volume to confirm the gains. But a healthy market should be marked by declining or lighter volume during the periods of price consolidation (such as the past two days).

With the U.S. markets rather lethargic and showing a lack of conviction, we have been scanning for potential trade setups among the international ETFs. Most of the international ETFs we looked at have badly damaged weekly chart patterns that we are not interested in trading because it goes against our core trading strategy. But one international ETF in a nice consolidation pattern, poised for a breakout to a new record high is iShares Mexico ($EWW). On the long-term monthly chart below, which shows you the “big picture” of its trend, notice that EWW is presently testing resistance of its all-time high. If it breaks out above the horizontal line annotate on the chart, there will be a complete lack of overhead supply and price resistance that should enable EWW to zoom higher:

Drilling down to the shorter-term daily chart pattern on the following chart, notice that EWW has been forming a valid base of consolidation near its high for the past four to five weeks. The daily trading range is also tightening up, which is positive, while the 20-day exponential moving average (EMA) is rising to provide support. Finally, volume has also been lighter than average during the consolidation:

As the daily chart shows, a rally above the $63.85 level would correspond to a breakout above its recent highs, which converge with resistance of its April 2012 high. Although resistance of its all-time high (shown in the first chart) is actually about one point higher, we woudl be comfortable with buying a breakout just above the $63.85 level because momentum from such a breakout would likely cause EWW to surge through that price resistance from years ago. Alternatively, one could buy a partial position on a move above $63.85, and then add to it on confirmation of the rally above the $65 area. EWW is unlikely to move above our trigger price in today’s session, but it will be on our official ETF trading watchlist as a potential breakout entry next week.

Overall, the stock market continues to show considerable resiliency, as it continues to consolidate on lighter volume at its three-day highs. The price and volume action is actually reminiscent of what we saw when the market broke out of its summer slump in 2011. At least for the moment, it appears the market bulls are maintaining control in what has been a choppy environment. If we can just see continued improvement in leadership among small and mid-cap growth stocks, that would surely be a positive for the broad market.

 
stock commentary:

Because August is one of the most popular months of the year for Americans to take vacations, the low volume levels and lack of conviction we have been seeing in the stock market is not that surprising. Realisitically, one might expect many more lackluster sessions at least until the end of the month. Although we have been coming across select chart patterns that look promising (such as ONXX, CMB, and EQIX), we must continue to be cautious until we start seeing a bit of conviction and follow-through in the markets. Until then, we will control risk through reduced share size on all new trade entries, as well as keeping a watchful eye on total equity exposure in the model accounts.

If you are a new subscriber, please e-mail rick@morpheustrading.com with any questions regarding our trading strategy, money management, or how to make the most out of this report.

 
relative strength combo watchlist:

Our Relative Strength Combo Watchlist makes it easy for subscribers to import data into their own scanning software, such as Tradestation, Interactive Brokers, and TC2000. This list is comprised of the strongest stocks (technically and fundamentally) in the market over the past six to 12 months. The scan is updated every Sunday, and this week’s RS Combo Watchlist can be downloaded by logging in to the Members Area of our web site.