Commentary:
Stocks got off to a rather uneventful start to the week, as the major indices closed at unchanged levels yesterday. The main stock market indexes opened the day slightly higher, then drifted in a tight, sideways range throughout most of the session, but succumbed to a bit of selling pressure in the final hour of trading. The S&P 500 Index, Nasdaq Composite, small-cap Russell 2000 Index, and Dow Jones Industrial Average all finished flat as a Dutch pancake (which, in case you were not aware, is thinner than an American pancake). The S&P MidCap 400 eked out a gain of 0.1%. The main bourses finished near the bottom third of their intraday trading ranges.
Total volume in the NYSE was 17% lighter than the previous day’s level, while volume in Nasdaq similarly eased 22%. Trading in both exchanges well below 50-day average levels. Turnover was also the lightest we have seen in approximately a month. The flat line price action of the major indices yesterday was apparently a direct result of the lack of institutional participation.
The best performing position in our model ETF portfolio right now is iShares Emerging Markets Bond Fund (EMB), which is showing an unrealized gain of 3.9 points since our September 13 entry (including a dividend distribution on October 1). Presently, the position is showing a capital gain more than 3 times greater than our average losing trade, but recent price action has not yet given us a reason to sell. Since EMB is at a fresh all-time high, there is a complete lack of overhead supply to hold it down. This is why stocks and ETFs at new highs typically continue much higher than the average investor might expect before eventually pulling back.
Rather than trying to call a top to determine our exit price in EMB, we are now using the 20-period exponential moving average on the shorter-term hourly chart as a guide for continually raising the stop higher to protect profits, while simultaneously maximizing gains. On the hourly chart of EMB below, the 20-EMA is the dotted beige line. The solid teal line is the 40-MA (we use the 40-MA on intraday charts, rather than the 50-MA used on daily charts):
In my book, Trading ETFs: Gaining An Edge With Technical Analysis, I discuss how the first retracement to test or “undercut” the 20-EMA on the hourly chart of a strongly trending ETF usually provides an ideal pullback entry if the initial breakout was not bought. The EMB chart above is a good example of this. Notice how, on both September 24 and October 1, the pullback that “undercut” the 20-EMA was very short-lived. Furthermore, EMB remained above its 40-MA the whole time. Because of the strong uptrend on the daily chart, the 20-EMA on the hourly chart quickly established itself as solid near-term support. As such, one can now use this moving average as a guide for continually raising the stop to maximize profits.
Since “undercuts” of the 20-EMA (quick probes below the 20-EMA support) are common, we have been placing our stop below the rising 40-MA, rather than the 20-EMA. However, because the trade is now showing a rather large gain in our model ETF portfolio, we are switching to a more aggressive stop, just below the 20-EMA instead. The rationale is that a pullback in EMB at this point could be pretty substantial. Therefore, we would rather lock in the prophet near the top, and subsequently reenter on a deeper pullback to support of the 20 or 50-day moving averages. We recently did this with DBA, which we sold near short-term peak, re-entered at a lower price, and subsequently sold at a higher level again.
Within the past several days, we have discussed and annotated the bullish chart patterns in both Guggenheim Solar ETF (TAN) and PowerShares WilderHill Clean Energy (PBW), two ETFs in the alternative energy sector. Led by a high volume rally in LDK Solar (LDK), which jumped 15%, both TAN and PBW broke out above short-term resistance yesterday. The breakouts are shown on the daily charts below:
Although we’ve been monitoring both ETS for potential buy entry, we made a judgment call to hold off on buying yesterday’s breakouts, based primarily on the light volume in both the broad market and the ETFs themselves. By the end of the day, for example, volume in both TAN and PBW failed to even exceed 50-day average levels. Nevertheless, both ETFs showed considerable relative strength to the broad market by holding onto significant gains on a day when the major indices were unchanged. We continue stalking both ETFs for potential buy entry, and would be particularly interested in buying on a test of yesterday’s intraday lows. Such price action would be disappointing to the bulls who just got long, which is actually bullish because they are forced to buy back in on the way back up, or else risk missing the move. Also, yesterday’s breakout should now serve as support on a pullback. Regular subscribers should note our detailed trigger, stop, and target prices in “Today’s Watchlist” below.
In today’s early pre-market trading, both the S&P and Nasdaq futures were trading as much a 0.9% lower. If this weakness persists into the open, it will be interesting to see if stocks blow off and reverse the sharp gap down, or if the weakness leads to a substantial down day. Frankly, we would prefer the latter scenario, as it could lead to a short-term correction that provides much better reward – risk ratios for new trade entry on strong ETFs (particularly a handful of international ETFs we’ve been patiently monitoring for pullback entry). Specifically, an “undercut” of the 20-day exponential moving averages by the main stock market indexes would be an ideal retracement that shakes out the “late to the party Charlies” who have only started buying the market within the past several days.
Today’s Watchlist:
PowerShares Clean Energy (PBW)
Long
Shares = 1,000
Trigger = $9.95 limit buy (pullback buy – 2 cents below yesterday’s low, and test of 20-EMA/60 min.)
Stop = $9.35 (below the 20 and 200-day MAs)
Target = $11.90 (test of January 2010 high)
Dividend Date = n/a
Notes = See commentary above for explanation of the setup. Note we will only buy PBW if it pulls back to our limit price of $9.95, unless an alert is received indicating otherwise.
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.
- Stops have been raised on three of our four open positions. With EMB, stop is now just below yesterday’s low, which is also about $0.30 below the 20-EMA/60 min. support. AMJ stop is similarly just below yesterday’s low. IBB stop has been raised to just below the 50-day moving average, and will be trailed tighter as the position moves further into the money.
- On October 1, EMB paid a dividend of $0.445 per share. The distribution has been included in the “Points” and “Unrealized P&L” columns.
- 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’s Wagner 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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Notes:
Edited by Deron Wagner,
MTG Founder and
Head Trader