Sector Rotation – Are Bank ETFs About to Correct? ($KBE) ($EUO)


Stocks fell on Thursday amidst quicker trade. The market gapped higher at the open but stocks struggled for most of the day, and by the close, had pulled the major averages near session lows. All five major indices fell on the day. The S&P MidCap 400 showed the most relative weakness as it slid 0.7%. Close behind was the S&P 500, which fell 0.6%. The tech-rich Nasdaq slid 0.5%, while the small-cap Russell 2000 drifted 0.3% lower. The Dow Jones Industrial Average, bolstered by gains in MMM and CAT, showed the most resiliency on the session as it closed lower by a modest 0.2%.

Internals were bearish on Thursday. Volume ticked higher on the Nasdaq by 4.4% and on the NYSE by 4.3%. Declining volume topped advancing volume by a factor of 2 to 1 on both exchanges. Yesterday’s higher volume combined with weak price action and bigger down volume, all add up to a distribution day on Wall Street.

Yesterday, on above average volume, the ProShares UltraShort Euro (EUO) gapped below its 50-day MA but recovered to close near session highs. With this “undercut” in place, EUO is now positioned for a possible recovery. Although it is too early to make the call for a long entry in EUO, yesterday’s price action has put the first piece of a potential long setup in place. What we will be looking for now is price stabilization at the current level and the formation of a setup that will give us the proper reward to risk ratio, in order to enter the trade. The pink candlesticks represent the type of price action that would provide an opportunity for a potential long entry. An “inside” candle followed by a false breakout would be just what the doctor ordered. Then, a move above the high of the false breakout candle would give us a legitimate entry.

Yesterday, on a significant spike in volume, the SPDR Bank ETF (KBE) formed a bearish “engulfing” candle, as it gapped-up but quickly reversed to close below Wednesday’s low. Even though KBE held support of the twelve day low and both its 20-day and 200-day MAs, this type of price action is not a good sign for those bullish on KBE. Further, this is the first attempt KBE has made to reclaim the 200-day MA and selling at this level would not be unusual. If KBE breaks support at yesterday’s low of $21.02, it could easily drop to support of the former downtrend line (Coincides with 50-day MA).

We exited our long position in IYR yesterday, yielding a sizeable 4.1% gain. IYR gapped up and rallied to within 18 cents of our target, and we felt it was prudent to exit the trade based on those circumstances. Shortly after we exited the position, IYR sold off for most of the day, and closed below our exit price. We remain in IYT, IYZ, XLP and DVY. Of the four, IYZ is showing the most relative weakness. We wouldn’t be surprised if it takes out its stop but we can always re-enter if it makes sense to do so.

Yesterday’s selling on higher volume is a possible early signal that the market may soon take a rest. Given that today was the first distribution day in the market since late December, a moderate correction may be overdue.

Today’s Watchlist:

There are no new setups for today. As always, we will send an intraday alert if any new trades are made.

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

Having trouble seeing the position summary graphic above? Click here to view it directly on your Internet browser instead.


  • Per intraday alert, sold IYR to lock in a 1.5% gain in the portfolio.
  • 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.

Edited by Deron Wagner,
MTG Founder and Head Trader