The “brick wall” of the 200-day MA


Commentary:

A short-term rebound attempt last week fizzled into major disappointment on Friday, as several of the main stock market indexes nosedived below their May closing lows. Stocks gapped sharply lower on the open, attempted to rebound in the first hour of trading, then reversed to new intraday lows by mid-day. Selling pressure picked up momentum in the afternoon, sending the major indices to massive losses by the closing bell. The Dow Jones Industrial Average plunged 3.2%, the S&P 500 3.4%, and the Nasdaq Composite 3.6%. Small and mid-cap stocks really took it on the chin, as the Russell 2000 tumbled 5.0% and the S&P Midcap 400 Index fell 4.1%. Each of the broad-based indexes closed near its lowest level of the day and week.

Worse than the sharp percentage losses in the broad market was the higher volume in both exchanges that accompanied the losses. Total volume in the NYSE swelled 32%, while volume in the Nasdaq was 6% higher than the previous day’s level. On June 2 and 3, the Nasdaq displayed encouraging action by registering back-to-back “accumulation days” (gains on higher volume), but it’s very negative that the index registered a bearish “distribution day” so soon after following through to the upside. Furthermore, the S&P and Dow lacked the confirmation of higher turnover when the Nasdaq scored its “accumulation days.” Then, after six straight days of declining volume in the NYSE, volume spiked 32% when stocks fell apart last Friday. Obviously, this is discouraging for the bulls who were banking on last month’s lows to provide solid support. Market internals were also as negative as they come, meaning the selling was extremely broad-based amongst all the industry sectors.

As investors have been looking for defensive places to park capital over the past month, the various fixed-income (bond) ETFs have started to show relative strength. Still, just like the broad market, volatility in the fixed-income ETFs has been the highest we’ve seen since late 2008. When iShares 20+ Year T-bond (TLT) pulled back to “undercut” support of its 20-day exponential moving average on June 3, we put it on our radar screen as a potential buy entry the following day. However, it gapped so high the following day that the reward-risk ratio was significantly impacted. Ideally, we’d like to see a week or two of tight, sideways price consolidation in TLT, which would build a base of support from which to make another leg higher in the intermediate-term. On the weekly chart of TLT below, notice the $95 to $100 area has marked the confines of a range-bound channel over the past few weeks. If price action now tightens up, we will look to either buy a breakout above the range, or an “undercut” of any obvious level of support that develops:

TLT

Overall day-to-day volatility in the stock market has been much higher than usual over the past month, and last Friday’s action shows no signs of a change in this situation. However, despite the wide intraday trading ranges and opening gaps that have been the norm in recent weeks, the 50 and 200-day moving averages of the S&P 500 and Dow Jones Industrials have been perfectly acting as pivotal levels of resistance. On the daily charts below, notice how the 200-day moving average has been acting like a brick wall since late May:

SPX

DJI

One of the most basic tenets of technical analysis is that a prior level of support becomes the new level of resistance, after the support is broken. Until last month, the 50 and 200-day moving averages of the S&P and Dow were providing price support, but the charts above clearly illustrate how they are now perfectly acting as resistance. Frankly, it’s unusual for the major indices to not probe beyond the actual support or resistance of the moving averages by 1 to 3% before reversing. Last week, we placed decent odds on the S&P and Dow moving back above their 200-day moving averages in the near-term, attracting more bulls to the market just in time for intermediate-term weakness to resume. But stocks apparently have been too weak to even manage a substantial “stop run” above the obvious levels of resistance. Nevertheless, although the S&P and Dow have fallen below their May closing lows, the February lows still (barely) remain intact. We’ll be monitoring price action closely in the coming days, to determine the appropriate plan of action based on whether or not those February lows manage to hold up.

Presently, the model portfolio of The Wagner Daily remains positioned in just two ETFs — long U.S. Natural Gas Fund (UNG) and short Market Vectors Gold Miners (GDX). However, both positions moved in the right direction last Friday. With a low correlation to the direction of the stock market, UNG continued building on its gains from last week’s breakout. Despite a 1% gain in the SPDR Gold Trust (GLD), GDX fell 2% and began heading back down to its prior lows. Making profits in the current, highly volatile environment is a matter of being positioned mostly in cash, while finding very select ETFs with a low correlation to the broad market. It appears we’re on the right track, as the net return of the model account has been flat to slightly higher while the broad market has gotten whacked over the past six weeks.


Today’s Watchlist:

There are no new setups in the pre-market today. As always, we will promptly send an Intraday Trade Alert if/when we enter anything new.


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.

    position summary

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    Notes:

  • Despite Friday’s sharp losses in the broad market, both of our open positions moved in the right direction that day. UNG built on its gains from the recent breakout, while GDX started to head back down towards its prior low. The USO short setup did not hit our trigger price, and has temporarily been removed from the watchlist.
  • 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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      Edited by Deron Wagner,
      MTG Founder and
      Head Trader