The S&P 500’s “line in the sand”


Building on the bounce off last week’s lows, the major indices scored another solid round of gains yesterday, but repressed volume levels indicated a lack of convincing enthusiasm. Stocks gapped higher on the open, then trended north throughout the rest of the session. The Nasdaq Composite rose 2.1%, as the S&P 500 and Dow Jones Industrial Average registered matching gains of 1.4%. The small-cap Russell 2000 and S&P Midcap 400 indices climbed 3.0% and 2.2% respectively. All the main stock market indexes closed near their highs of the day.

As with the large bounce of May 10, lighter turnover prevented yesterday’s broad-based rally from being confirmed by volume. Total volume in the NYSE receded 12%, while volume in the Nasdaq was 8% lighter than the previous day’s level. It was the third straight day of declining volume in both exchanges, indicating mutual funds, hedge funds, and other institutions have been skeptical about buying the bounce off last week’s lows. Although this does not mean the market could not continue to grind higher on declining volume in the ultra near-term, sustainable rallies can not be formed with steadily declining volume. We remain on the lookout for the market’s first “accumulation day” (a session of higher volume gains), as that would give us the initial signal that institutions are starting to exhibit buying interest again. Until then, all long positions should be monitored closely.

Because of yesterday’s rally, the S&P 500 enters today session right at resistance of its 50-day moving average, a pivotal “line in the sand.” The 20-day exponential moving average has also converged with the 50-day moving average, providing further resistance. Just above that convergence point, the prior lows from April will act as horizontal price resistance. Convergence of the 20 and 50-day moving averages, just above yesterday’s closing price, is shown on the daily chart of the S&P 500 SPDR (SPY), a popular ETF proxy for the S&P 500 Index:


Although it’s possible the S&P 500 could move right back to its prior highs without further correction, the combination of key moving average convergence, resistance of the prior lows from April, and steadily declining volume on the bounce off the lows leads up to believe there’s a better chance of the index retesting the lower half of its May 6 range first. If the broad market is to head back down to “shake out” the bulls who just bought the bounce off the lows, this is a logical area where it could happen. Realize that such a test of the recent lows would actually be healthy, not negative, for the intermediate-term view of the broad market, as it wash out the remaining “weak hands,” enabling the major indices to reset themselves, build new bases, and resume their prior uptrends.

On the bounce of May 10, we entered a new short position in iShares Russell 2000 Index (IWM). Because the index had exhibited relative weakness during the prior week’s sell-off, we anticipated a resumption of that relative weakness once selling came back into the markets. But the challenge with trading a small-cap ETF is that small caps tend to show leadership in both directions — leading the market higher on the up days, and lower on the down days. In this case, we still expect another move lower in the broad market within the next few days, but small caps are getting run, making it difficult to stay with our short position. Yesterday, IWM probed above resistance of its hourly downtrend line, triggering traders’ stops in the process. We made a small adjustment to our stop to provide some “wiggle room” above the downtrend line, but we don’t want to stay short IWM if it goes much higher. If we close a trade with a loss, we can always re-enter the position when the timing is right. The hourly chart of IWM is shown below:


In yesterday’s commentary, we suggested starting a watchlist of ETFs that have been showing relative strength this month, each of which would be a potential buy candidate when market conditions become more bullish and accumulation returns to the markets. So far, we have iShares Thailand (THD) and iShares Malaysia (EWM) on our watchlist. Another ETF to consider adding to the watchlist is the KBW Bank SPDR (KBE). While not all sub-sectors of the financial arena have been acting well, the banks have snapped back. As the daily chart below illustrates, KBE is back above its 20 and 50-day moving averages, and is poised to break out above resistance of a three-week downtrend line:


Unlike other ETFs that are consolidating near their highs, U.S. Natural Gas Fund (UNG) is a potential trend reversal candidate. In late April, we bought UNG when it attempted to break out above the high of a tight range on April 28. However, the breakout attempt failed badly, as UNG got crushed the next day. We simply honored our original stop, taking no more than an average loss on the trade. In hindsight, our buy entry was early, as UNG apparently needed to have one more “shakeout” before getting its sea legs. Now, the setup is even better because UNG “undercut” the lows of its range on May 6, washing out the last of the die-hard bulls, then snapped back two days later. The daily chart is shown below:


Going into today, UNG is poised to break out above its 50-day moving average, which would be the first time since January of this year. If it does, traders might simply consider buying a move above yesterday’s high. Alternatively, a more conservative entry would be to wait for a breakout above the highs of the recent range (above the $7.75 area), and THEN buy the first pullback to new support of the 50-day moving average. We’ll certainly consider a re-entry into UNG, but prefer the latter scenario for entry. Although the entry price would likely be higher, there would also be a better chance of a profitable outcome if waiting for more price confirmation, and then buying the pullback.

Today’s Watchlist:

There are no new setups in the pre-market today, although we’ll be monitoring UNG for potential buy entry in the coming days. Other ETFs on our bullish watchlist now include: THD, EWM, and KBE. If any new trades are entered, we will promptly send an Intraday Trade Alert with details.

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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  • Although we rarely loosen stop prices, we occasionally make a judgment call to do so whenever a chart pattern has changed in a way that causes our stop to be right at a key level of resistance. In the case of IWM, our stop ended up converging with resistance of the hourly downtrend line (shown above). Therefore, we raised the stop a bit, in order to afford a bit of “wiggle room” necessary to survive a stop run. Thereafter, IWM came within 8 cents of our stop price, so we tweaked the stop just a few cents more going into today, as we never want to have a stop price so close to prior day’s high or low. In the end, our IWM stop is now exactly one point higher than where it originally was, but our maximum capital risk is still within line, as the trade was originally sized with slightly less than full risk per trade. If IWM moves lower, we’ll trail the stop back down to remove some risk from the trade, as soon as we are able. Sometimes, a bit of discretion is needed in trading, and this was one of those instances.
  • 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