Over the past two days, the broad market appears to have put in a short term bottom. However, we are still in a downtrend and will be looking for shorting opportunities into any bounces. Below are charts of the Nasdaq and the S&P 500 that show the next significant resistance levels on both indices. Notice that volume has, thus far, been light compared to the volume during the recent decline. This type of volume action is typically viewed as bearish. We will be looking for the S&P and Nasdaq to form reversal candles near their respective 10-day and 20-day moving averages, as a signal for taking on potential new short positions.
Yesterday, on a spike in volume, the ProShares UltraShort Oil and Gas ETF (DUG) formed a distinct reversal candle and could offer a buying opportunity on a pullback into support near its 10-day and 20-day moving averages. We will be monitoring this ETF closely for a potential pullback buy entry. On a pullback buy entry, we look for an ETF to undercut a key moving average or support level, and form a reversal candle. The reversal candle then serves as the pivot for a possible trade entry. In this example, the potential long entry would occur on a move above the reversal candle.
In the May 9th, 14th, 17th and 30th editions of the Wagner daily we discussed the head and shoulders pattern that was forming/had formed on the small-cap Russell 2000. In the May 9th newsletter we stated, “if the Russell 2000 loses support of the neckline at 785, then the predicted selloff would be to 720. We will be monitoring the Russell carefully, as its next test of the 785 mark could result in the loss of support and a significant move lower”. On May 14th we commented that, “(a move by IWM) below Friday’s low of $78.42 could result in a break of the neckline of the head and shoulders pattern. A drop below this key market would likely result in a quick move to the 200-day MA for IWM. On May 17th we stated that, “IWM did in fact breach its neckline and now appears headed for the 200-day MA. In all likelihood, IWM will find support at its 200-day MA. Typically, when a neckline of a head and shoulders pattern is broken, a subsequent bounce will occur back up into resistance near the neckline. This bounce generally results in another shorting opportunity.” (See IWM chart from May 17th Newsletter posted below).
XLY hit its trigger yesterday and we entered the trade. However, we do not like the fact that XLY formed a reversal candle on higher volume, so we are exiting the position at market on the open. Market bears and market bulls have been in a knife fight over the past two weeks. Since the market bottomed on May 18th, we have seen three accumulation days and one distribution day. Still, price action has been unimpressive as the market has struggled to find higher ground. Given the indecisiveness in the market we are inclined to remain on the sidelines until a definitive move occurs.
Yesterday, the S&P Select Consumer Discretionary SPDR ETF (XLY) surrendered support of its 20-day EMA, as it gapped down and closed near session lows. A volume assisted move below yesterday’s low of $43.07 could provide a short entry trigger for this ETF. We are placing XLY on the watchlist. Trade details are posted in the watchlist section of the newsletter. There is no inverse ETF for the consumer discretionary sector.
Over the past five sessions, the market has begun to show signs of a potential reversal. However, there is still a lot of overhead to get through and we are inclined to be cautious about changing our bearish sentiment of the market. A quick review of the Nasdaq and the S&P 500 should help to clarify why we are not overly anxious to go long the market without further confirmation.
Yesterday, on an uptick in volume, the iShares Dow Jones Transportation Average Index Fund (IYT) failed to reclaim support of its 20-day EMA and closed near session lows. A drop below the two day low of $90.45 could present a shorting opportunity in this ETF. We are placing IYT on the watchlist. Trade details are posted for our clients in the watchlist section of the newsletter. We recommend calling your broker prior to the open to ensure that shares are available for shorting. There is no inverse transportation ETF available as an alternative to shorting IYT.
Over the past five sessions the Direxion Semiconductor 3x Bear ETF (SOXS) has held support above its 10-day MA while trading in a four dollar range. A volume fueled move above the five day high of $50.00 could present a buying opportunity in this inverse ETF. Ideally, we would like to see an undercut of the five day low prior to SOXS potentially moving higher. Undercuts serve to shake weak hands out of the trade while at the same time sweeping poorly placed stops.
Based on yesterday’s price action, it appears as if we will see a move higher in the broad market over the next several days. However, there is still considerable overhead in store for market bulls. The charts of the SPDR S&P 500 ETF (SPY) and the ProShares Nasdaq ETF (QQQ) below, show the next significant resistance levels for both ETFs and are self explanatory. We will likely be looking to establish new short positions when these indices approach these resistance levels.
Yesterday, on a burst of volume, the ProShares UltraShort Silver ETF (ZSL) tested its 3 day low and undercut the 10-day EMA before reversing to close near session highs. A volume fueled move above yesterday’s high of $68.21 could provide a buying opportunity in this ETF. We are placing ZSL on the watchlist. Trade details are available to our subscribing members in the watchlist segment of the newsletter.