In keeping with the pattern of the past week, the broad market once again showed a great deal of intraday indecision and erratic behavior, but this time the major indices closed lower. After selling off sharply throughout the morning, then recovering back to flat in the afternoon, stocks sold off moderately during the final hour. The roller-coaster action resulted in a 0.3% loss in the S&P 500 and a 0.5% drop in the Dow Jones Industrials. The Nasdaq Composite closed only 0.2% lower and continued to hold above its 50-day moving average. Both the S&P 400 Mid-Cap and Russell 2000 Small-Cap indices shed 0.3%. The major indices again closed near the middle of their intraday ranges, confirming the indecision.
Total volume in the NYSE increased by 4% yesterday, while volume in the Nasdaq was 1% lighter than the previous day. The increase in NYSE volume combined with yesterday’s losses registered the session as a bearish “distribution day.” However, volume in both exchanges remained well below average levels. Turnover in both exchanges has only exceeded its 50-day average level in one of the past ten sessions, which is typical of the “summer doldrums.” Like the previous day, market internals in both the NYSE and Nasdaq were mixed throughout the session, but declining volume moderately exceeded advancing volume by day’s end. While market internals typically give us a good indication of what is happening “beneath the surface,” an accurate analysis is difficult when volume levels are so low. Proof is that internals have been reversing from session to session.
In yesterday’s Wagner Daily, we briefly discussed the potential long setup in BBH (Biotech HOLDR). Subscribers will recall that we netted a gain of approximately 15 points on the last big move in BBH, back in July, then closed the position to allow it time to correct. Rather than correcting by price and retracing significantly, BBH appears to be correcting by time instead. The weekly chart of BBH shows a tight, sideways consolidation over the past month. Notice also how BBH is coming into support of its weekly uptrend line (the blue line), which began with the low of March:
The fact that BBH did not sell off with the broad market throughout the month of August means the sector is showing relative strength as well. Therefore, we expect the Biotechs to be among the first sector to rally when/if the market does so. Our buy point in BBH will be above the daily downtrend line that began with the August 3 high (subscribers are provided trigger, stop, and target prices in the “watchlist” below). A break of this downtrend line also corresponds to a breakout above the 20-day moving average. The shorter-term daily chart below illustrates this :
The S&P 500 closed below its 50-day moving average for the first time since May 16 yesterday, but the index is still holding within its recent trading range. This, along with the fact that the Nasdaq is still above its 50-day MA, means it is still too early to aggressively short SPY (S&P 500). Furthermore, the Nasdaq has entered a volatility contraction as it trades in a narrow range just above its 50-day MA. The longer the volatility contraction continues, the greater the eventual move will be, but the big question is which way it will go. Watch for the Nasdaq to soon break out of the narrow range shown on the daily chart below:
Yesterday was another clear example of why we have been advocating a mostly cash position in the short-term. Attempting to predict the next direction of the major indices will only result in overtrading and churning your account. We hate to sound like a broken record, but the market’s recent action speaks for itself. Do yourself a favor and wait for the market to shows its hand, then you can simply trade in that same direction, whichever way it eventually goes. Being positioned mostly in cash will enable you to quickly react so you can profit from the market’s eventual breakout or breakdown. We’ll be ready to buy or sell short the broad-based ETFs when the signals are there, but we will remain patient until that occurs.
BBH – Biotech HOLDR
Trigger = above 191.45 (above 20-day MA)
Target = new highs (will trail stop)
Stop = 188.70 (below yesterday’s low)
Shares = 200
Notes = As discussed in the commentary above, BBH is poised for a resumption of its primary uptrend. Our entry point will be above the 20-day MA, which also correlates to a breakout above the downtrend line from the August 3 high. If you have never traded BBH before, note that it can be quite volatile, so be sure to adjust your share size accordingly.
Daily Reality 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:
Open positions (coming into today):
RTH short (200 shares from Aug. 5) –
shorted 100.20, stop at 99.80, target 95.20, unrealized points = + 2.63, unrealized P/L = + $526
UTH short (150 shares from Aug. 10) –
shorted 113.13, stop 114.55, target 107.80, unrealized points = (0.76), unrealized P/L = ($114)
Closed positions (since last report):
RTH short (200 shares from Aug. 5) –
shorted 100.20, covered 97.81, points = + 2.39, net P/L = + $474
Current equity exposure ($100,000 max. buying power):
Per intraday e-mail alert, we lowered the stop on half of the RTH position yesterday. This enabled us to lock in a gain of 2.39 points on 200 shares, but we still remain short 200 with new stop of 99.80. Because UTH closed yesterday so close to its stop price, it could easily open, trigger our stop on the upside, then fall lower. As such, we have raised the stop only slightly to give it a little “wiggle room.” We will, of course, honor the new stop if it is hit.
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Click here to view MTG’s past performance results (updated monthly).
Edited by Deron Wagner,
MTG Founder and