Commentary:

Traders returned from the holiday weekend in aggressive selling mode yesterday, causing the major indices to wipe out last week’s gains, and then some, in a single day. The Nasdaq plummeted 2.1%, its worst loss since the broad market selloff began on May 11. Small-cap stocks were hit even harder, which resulted in a 2.5% loss for the formerly market-leading Russell 2000 Index. It was the largest percentage loss for the Russell since October 5, 2005. The S&P 500, S&P Midcap 400, and Dow Jones Industrial Average each sustained damage of 1.6% losses. Nearly all the broad market’s losses were again the result of a steady intraday downtrend as opposed to a large opening gap down. Since this month’s selloff began, there has been a larger than average quantity of “trend” days in the market. This has provided the benefit to traders of enabling stocks and ETFs to realize their volatility through smooth intraday trends as opposed to large opening gaps that are sometimes difficult to profit from.

Total volume in the NYSE rose by 15% yesterday, while volume in the Nasdaq was 12% higher than the previous day’s level. The broad-based losses on higher volume resulted in both the S&P and Nasdaq marking another bearish “distribution day.” But despite the higher volume selling, volume levels in both exchanges were still below average. Market internals were firmly negative, as confirmed by the fact that every major industry sector we follow closed lower yesterday. In the NYSE, declining volume exceeded advancing volume by a huge margin of more than 8 to 1! The Nasdaq internals were better, but still closed with a negative ratio of approximately 7 to 2. The discrepancy between the NYSE and Nasdaq market internals indicates more selling pressure was beneath the surface of the NYSE than the Nasdaq. Stocks in the NYSE are now playing “catch up” to the large losses in the Nasdaq, which has been showing more relative weakness than both the S&P and Dow until now.

Are you looking for an ETF to buy, perhaps in a cash account that does not permit short selling, but are concerned by the broad weakness that has struck both the U.S. and international markets? If so, we suggest you take a look at a fresh specialty ETF that is completely uncorrelated to stock market prices. The first exchange traded fund that enables you to participate in the foreign exchange currencies markets, the Euro Currency Trust (FXE) trades in direct correlation to the price of the Euro vs. the U.S. dollar. Currently, the dollar is trading at 1.28 to the Euro. FXE closed yesterday at $128.90, which is roughly equal to one hundred times that price. Because the Euro is looking quite bullish right now, FXE is poised to break out higher as well. As you can see on the daily chart below, FXE broke out in the middle of last month, trended higher for for weeks, and has since been consolidating near the high for the past two weeks. The 20-day moving average is also acting as support:

Based on its bullish consolidation, FXE can be bought over its May 12 high of 129.46. Aggressive traders might consider buying a partial position just over yesterday’s high. A logical place for a protective stop loss is below the recent consolidation, around the $127 area. Specific trigger, stop, and target prices are provided to subscribers below. In addition to this currency ETF, don’t forget about the other specialty ETFs such as those that track the prices of commodities and government bonds. A complete listing of all the ETFs presently trading on the U.S. markets, grouped by sector and sub-sector for easy reference, is available for free by downloading the Morpheus ETF Roundup reference guide.

As for the major indices, one thing we like is how the Dow Jones Industrial Average reversed perfectly after running into resistance of its 50-day moving average yesterday. Take a look at the daily chart of the Dow Jones DIAMONDS (DIA), which we are currently short:

Last week’s low of 110.19 is the next support level in DIA (11,030 in the Dow itself). If DIA breaks that low, it should quickly slide down to its 200-day moving average at the 108.50 area.

The S&P 500, which we analyzed in yesterday’s newsletter, also reversed nicely after running into resistance of its 38.2% Fibonacci retracement level. The index closed yesterday right above its 200-day moving average that it bounced off of last week. Obviously, that 200-MA is a pivotal support level, so we’ll be watching to see whether the S&P again attempts to find support here or if it quickly falls to new lows.

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Today’s Watchlist:

FXE (Euro Currency Trust)
Long

Trigger = HALF above 129.16, HALF above 129.56 (see notes below)
Target = new high (will trail stop)
Stop = 127.05 (below the low of the consolidation)
Shares = 200

Notes = We plan to buy half of the position (100 shares based on the model) over the May 22 high and yesterday afternoon’s consolidation, then add another 100 shares over the ultimate high of 129.46. “Scaling in” reduces our risk exposure by requiring the setup to confirm its strength before assuming the risk of full position size.

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TLT (iShares 20+ yr. T-Bond Fund)
Long

Trigger = above 84.59 (over the May 26 high)
Target = 89.20 (resistance of prior highs from March)
Stop = 83.58 (below 20-day MA and May 23 low)
Shares = 400

Notes = This setup from last week did not trigger yet, but we still like it for potential long entry. Note the new trigger price. As discussed last week, the fixed-income ETFs are forming a base and positioned to break their downtrend lines. Weakness in the broad market may further contribute to strength in these ETFs as a “flight to safety.” We are looking to play a relatively short-term rally up to resistance of the prior high in TLT. There is a 50-day moving average overhead, but we feel the momentum from a break above the highs of this base should easily push TLT through it. Other bond ETFs such as IEF have equally nice or even better chart patterns, but the problem is that they have VERY low volatility that ties up a lot of capital for such a small upside potential. If, however, you have a large trading account, you might consider IEF over TLT, but we will be tracking TLT because it has a better average true range (ATR).

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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:

Open positions (coming into today):
DIA short (350 shares from May 23 entry) –
sold short 111.30 (avg.), stop 113.65, target 106.30, unrealized points = + 0.47, unrealized P/L = + $165

Closed positions (since last report):

none

Current equity exposure ($100,000 max. buying power):

$38,791

Notes:


The additional 100 shares of DIA short triggered yesterday and the new average price on the full position is reflected above. Also note the new stop price, which is also for the full position. TLT did not yet trigger, but we’ll give it another day or two on the setup list.

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here for glossary and explanation of terms used in The Wagner Daily

Click here to view MTG’s past performance results (updated monthly).

Edited by Deron Wagner,
MTG Founder and
Head Trader