Stocks attempted a modest broad-based rally yesterday morning, but the strength evaporated in the afternoon, causing the major indices to finish with mixed results. The Dow Jones Industrial Average gained 0.3%, but the Nasdaq Composite lost 0.2%. The S&P 500 was unchanged. In keeping with the recent trend, small and mid-cap stocks continued to lag behind. The Russell 2000 fell 0.5% and the S&P Midcap 400 closed 0.4% lower. The fact that the morning gains in the Russell and S&P 400 were less substantial than the S&P 500 and Nasdaq served as an early warning sign to astute traders. Typically, most broad-based rallies are led by the small and mid-cap arena.
Volume dropped off slightly in both exchanges, enabling the Nasdaq to dodge a bearish “distribution day.” Total volume in the NYSE declined by 1%, while volume in the Nasdaq was 7% lower than the previous day’s level. It was the second consecutive day of lower volume losses in the Nasdaq, which indicates that the bears are, at least in the short-term, taking a rest. We have not yet seen the follow-through day of broad-based gains on higher volume, but the hiatus in institutional selling may enable stocks to sustain a rally if the buyers return to the scene. Internals oscillated between negative and positive territory throughout the day, but advancing volume finished slightly higher than declining volume in both exchanges.
One ETF that may be poised to break down to new lows is the Biotech HOLDR (BBH). Having been in a steady downtrend since November of 2005, it is nothing new that BBH is showing relative weakness, but the trend appears as if it may continue for quite a bit longer. On June 1, BBH broke out above its 50-day moving average for the first time since March of 2006. It initially appeared as if the downtrend was in danger of reversing, but the bears promptly sold the biotech stocks into strength, causing BBH to fall back down below its 50-day MA only two days later. Since then, the 50-day MA has acted as a brick wall in preventing any rally attempt in the ETF. Yesterday’s drop caused BBH to close right at a major area of horizontal price support. Any further in the coming days will result in the prior lows being broken and the formation of a new 11-month low. Consider shorting such a breakdown, but only if you are disciplined enough to quickly cover the position in the event of sudden upside follow-through from the broad market gains of June 15. The daily chart below illustrates how BBH closed just above its area of horizontal price support:
Yesterday’s choppy and indecisive session did not change the overall technical picture of the broad market. As discussed yesterday, both the S&P 500 and the Nasdaq Composite remain in the lower third of their ranges from the June 15 rally. The Dow has been the only bright spot and has retained most of its gains from that day. Many industry sectors remain just above or below the pivotal levels of their 200-day moving averages. As for the direction of the broad-based ETFs, we remain on the sidelines in “wait and see” mode. Open ETF positions remain the Telecom HOLDR (TTH) and the iShares 20+ year T-bond (TLT), both long. In addition to the Biotech HOLDR setup, regular subscribers will also see that we are stalking another industry sector ETF for a potential short entry.
IYT – iShares DJ Transportation Index
Trigger = below 82.65 (below the June 19 low)
Target = 76.45 (support of 200-day MA)
Stop = 85.15 (above 50-day MA resistance)
Shares = 200
Notes = Like most ETFs, IYT broke support of its primary uptrend line last month and fell below both its 20 and 50-day moving averages. It bounced off its lows last week, but now appears to be stalling at resistance of its new downtrend line. It also has overhead resistance of the 50-day MA. If it trades below the June 19 low, it could result in a resumption of the new downtrend. If it does, we expect an eventual break of the prior low and subsequent drop down to the 200-day MA.
Be aware that IYT may be on your broker’s “hard to borrow” list. This means your brokerage firm’s web site may initially tell you that shares are not available for shorting. But if this occurs, we recommend you phone your broker and specifically ask them to locate shares of IYT to borrow for short selling. With a little push, your firm should easily be able to call around and get shares for you within a matter of minutes. If not, consider switching to a different firm who offers a wider selection of stocks and ETFs for shorting. Just a little advice for those of you run into this issue.
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):
TTH long (700 shares from June 15 entry) –
bought 29.09, stop 28.11, target new high (will trail stop), unrealized points = + 0.35, unrealized P/L = + $245
TLT long (320 shares from June 2 entry) –
bought 84.70, stop 83.85, target 89.45, unrealized points = (0.65), unrealized P/L = ($208)
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
The short setup in IYT did not trigger yesterday, but remains on our watchlist going into today. No changes to the open positions.
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Edited by Deron Wagner,
MTG Founder and