iShares small-cap Russell 2000 (IWM) in a precarious position


Sparked by initial enthusiasm over some merger and acquisition activity in the market, stocks got off to a strong start yesterday morning. However, the enthusiasm was short-lived. The major indices quickly reversed, fell into negative territory in the morning, traded in a range throughout most of the afternoon, then slipped to new intraday lows into the close. The S&P 500 Index and Dow Jones Industrial Average both lost 0.4%. The Nasdaq Composite declined 0.9%. The small-cap Russell 2000 Index and S&P MidCap 400 shed 1.3% and 0.9% respectively. Each of the main stock market indexes closed at its dead low of the day.

Total volume in the NYSE was 23% lighter than the previous day’s level, while turnover in the Nasdaq eased 16%. In both exchanges, trading limped in below 50-day average levels. Yesterday’s lighter volume losses prevented the S&P and Nasdaq from registering a bearish “distribution day.” However, the amount of institutional selling becomes less insignificant when the market is already in correction mode. Monitoring the running count of “distribution days” is more relevant when uptrending markets first start exhibiting possible signs of weakness. Conversely, when the market has already been trending lower, it often falls on its own weight, due more to a lack of buying interest than heavy selling pressure.

Although stocks have sold off in each of the past three days, and set new closing lows for August yesterday, the main stock market indexes are still holding near their intraday lows of the previous week. Furthermore, support of the mid-July lows is still holding up. Overall, the technical picture of the market hasn’t changed much in recent days. However, the major indices could break down below key levels of horizontal price support with just one more day of selling. If that happens, a test of the July lows, which is also lower channel support of the four-month sideways trading range and “inverse wedge” pattern, would likely follow. Looking particularly vulnerable is the small-cap Russell 2000 Index, which is only about 2% above its July low. The daily chart of iShares Russell 2000 Index (IWM) is shown on the daily chart below:


As marked by the dashed horizontal line on the chart above, a breakdown below the August 20 low would also correspond to a break below support of the mid-July “swing lows.” A test, and likely “undercut” of the early July lows, would probably occur thereafter. Our long position in the inversely correlated ProShares UltraShort Semiconductor (SSG) has a similar chart pattern to ProShares UltraShort Russell 2000 (TWM).

The daily chart of the Nasdaq 100 Index is also in a precarious situation. Although it is much further above its July lows than the Russell 2000, it would only require another decline of approximately 0.5% to cause the index to fall below the lows of its two-week trading range. Bearish momentum and selling pressure would be the likely outcome of such a move. Below is the daily chart of PowerShares QQQ Trust (QQQQ), a popular ETF proxy for the tech-heavy Nasdaq 100 Index:


Given the premarket weakness in the S&P and Nasdaq futures, stocks are likely to be under pressure on the open. Unless the opening gap down swiftly reverses, the key technical levels of support shown on the charts above will become violated today. Nevertheless, even if stocks break down below support of their recent trading ranges, we do not expect a lot of follow-through to the downside. In fact, we would not even be surprised to see a bullish reversal of today’s opening gap down. Why? Simply because the dominant theme of the stock market over the past four months is a sideways trading range. With stocks in “no man’s land,” follow-through in the direction of a trend, either up or down, is the exception, rather than the norm. We hate to sound like a broken record, but that’s the reality of the current environment.

Today’s Watchlist:

There are no new setups in the pre-market today. As always, we will promptly send an Intraday Trade Alert if any new trades are entered.

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 $50,000Wagner 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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    • No changes to our open positions above.
    • On August 2, TLT paid a dividend distribution of $0.324 per share. On July 1, TLT also paid a dividend of $0.31 per share. This additional profit from both dividend distributions has been added to both the “Points” and “Current P/L” columns (shaded in light blue to indicate dividend distribution included).
    • Reminder to subscribers – Intraday Trade Alerts to your e-mail and/or mobile phone are normally only sent to indicate a CHANGE to the pre-market plan that is detailed in each morning’sWagner Daily. We sometimes send a courtesy alert just to confirm action that was already detailed in the pre-market newsletter, but this is not always the case. If no alert is received to the contrary, one should always assume we’re honoring all stops and trigger prices listed in each morning’s Wagner Daily. But whenever CHANGES to the pre-market stops or trigger prices are necessary, alerts are sent on an AS-NEEDED basis. Just a reminder of the purpose of Intraday Trade Alerts.
    • For those of you whose ISPs occasionally deliver your e-mail with a delay, make sure you’re signed up to receive our free text message alerts sent to your mobile phone. This provides a great way to have redundancy on all Intraday Trade Alerts. Send your request to [email protected] if not already set up for this value-added feature we provide to subscribers.


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Edited by Deron Wagner,
MTG Founder and Head Trader