Pullback buy setup in Solar ETF ($TAN)

market timing model:

– Signal generated on the close of April 30

We are now in confirmed buy mode, which means that we can go on margin if needed.

(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. Net P/L figures are based a $100,000 model portfolio. 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.

$todays watchlist

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closed positions:

open position summary

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ETF position notes:

  • No trades were made.

stock position notes:

  • $YELP hit our stop and we are out.

ETF, stock, and broad market commentary:

After four straight weeks of gains, stocks finally took a breather yesterday and the major indices sustained substantial losses. The Dow Jones Industrial Average lost 0.5%, the S&P 500 fell 0.8%, and the NASDAQ Composite slid 1.1%. Turnover surged across the board, causing both the S&P and NASDAQ to register their first confirmed “distribution day” since the rally off the mid-April lows began. Total volume in both the NYSE and NASDAQ jumped more than 20% above the previous day’s levels.

Given that the stock market has been relentlessly marching steadily higher for more than a month, yesterday’s correction was not surprising, nor of major concern. Even the strongest of uptrends do not move in a straight line forever, and pullbacks along the way are both normal and healthy.

In hindsight, it’s easy to say that momentum traders should have been taking profits on long positions (before yesterday’s decline) because the market is “overbought.” But this is faulty reasoning because the same thing could have been said a full one or two weeks ago. Those who have been on the sidelines have been missing out on profitable trading opportunities, despite the market being “overbought.” This is why our mantra is to always trade what we see, not what we think!

Since our trading system is based on the performance of individual stocks and ETFs, rather than the main stock market indexes, our main focus is how well leading stocks hold up during pullbacks in the broad market. As long as they do, short-term corrections must be viewed as a buying opportunity. This bias (and our market timing model) changes only when leading stocks start falling apart, sector rotation dries up, and/or the broad market suffers five or more distribution days (higher volume selloffs) over the course of 3 to 4 weeks.

Now that the stock market is apparently entering short-term correction mode, we have begun scanning for potential pullback entry points in stocks and ETFs with the most relative strength to the broad market. Two such ETFs are Market Vectors Semiconductor ETF ($SMH) and Guggenheim Solar ETF ($TAN).

Since selling $SMH for a 9% gain last week (), we have been stalking this ETF for an ideal re-entry point. Because it has been among the leading sector ETFs of the current rally, we were initially looking for possible re-entry above the high of its recent consolidation. However, now that $SMH is pulling back to near-term support of its 20-day exponential moving average, the reward to risk ratio for buy entry is even better:

$SMH pullback entry

Notice that $SMH is coming into support of its 20-day exponential moving average for the first time since it broke out four weeks ago. Typically, the first touch of this moving average after a strong breakout presents a low-risk pullback entry point. As such, notice we have changed the buy setup on our watchlist from a buy stop (as it was yesterday) to a buy limit order. This means we will only buy the ETF if it trades down to our buy limit price, which is just below yesterday’s low (see today’s watchlist for full trade details).

Because this $SMH trade setup is anticipatory (entering before the swing low is formed), our initial stop price is fixed at roughly 3% below the entry price. However, if the setup triggers for buy entry today, we will mark support of the swing low that subsequently forms, then adjust our stop price accordingly.

Another ETF we have been stalking for a pullback entry is $TAN, which blasted off and ripped approximately 30% over the past two weeks. We missed the initial breakout entry of this ETF, but it is now pulling back to the area of its 10-day moving average. Because this ETF has been showing so much relative strength since its breakout, there’s a good chance it will not retrace all the way down to its 20-day exponential moving average before the buyers return. As such, we believe it is a good risk to buy $TAN on a test of its 10-day moving average. Take a look:

$TAN pullback entry

In addition to $SMH being on today’s watchlist as a potential pullback buy entry, we have also added $TAN to as a possible pullback entry. As with $SMH, our initial stop is based on a fixed percentage, but we will adjust the stop accordingly if the ETF triggers for entry and subsequently forms a new swing low.

Ideally, we would like to see an opening gap down in the broad market (due to bearish follow-through from yesterday’s selling) that leads to a bullish reversal by the close. But even if that doesn’t happen, we feel pretty good about taking a shot at two of the strongest sector ETFs in the market on a pullback.

After two days of stalling action, $YELP triggered its sell stop with an ugly 7% sell off on higher volume. $YELP can still be a big winner, however; it clearly needs more time to base out (should stay above $28). $NOW closed below 20-day EMA, which isn’t a good sign for our setup. This stock could also still be a decent winner, but in the short term we may be stopped out.

Please note that we plan to sell the full position of $UA if our tight stop is hit.

While it was a rough day for the stock side of the portfolio, setups like $URI and $AMBA are not dead and may just need more time to consolidate before heading higher.

How leading stocks react to a potential pullback in the market will be key. For example, stocks like $ANGI and $ALKS, do they pull back in for a few days and then bounce higher off support or break down on higher volume?

$ANGI bullish base

$ALKS bullish base

$SLCA triggered a buy entry on a limit order at support of the 50-day MA late in the day. If this stock is ready to move higher it will hold above the 50-day MA as it consolidates (minus a 1 or 2 day shakeout below $22).

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