Commentary:

Tuesday’s bullish reversal day looked promising, but the broad market sold off sharply yesterday, giving back all of Tuesday’s gains and then some. The small-cap Russell 2000 and Nasdaq Composite led the way lower, as both indices suffered 1.8% declines. The S&P 500 and Dow Jones Industrial Average each lost 1.1%, while the S&P Midcap 400 fell 1.2%. All of the losses resulted from the major indices trending steadily lower throughout the day as opposed to opening gap downs. Most stocks also finished near their intraday lows, pointing to the likelihood of follow-through downside momentum in this morning’s session.

Total volume in the NYSE declined by 5% yesterday, while volume in the Nasdaq was 10% lighter than the previous day’s level. Given the extent of the broad market’s losses, one might have expected to see a corresponding surge in turnover, but the lower volume tells us that institutions were not heavily dumping shares. Still, market internals were not pretty. Declining volume exceeded advancing volume in both exchanges by a ratio of nearly 4 to 1.

In yesterday’s Wagner Daily, we discussed the bullish charts of both the DB Commodity Index (DBC) and the StreetTRACKS Gold Trust (GLD). Not surprisingly, the oil-related ETFs are also looking good. The Oil Service HOLDR (OIH) has been consolidating at its 50-day moving average since breaking out above its six-week downtrend line on June 29. Most likely, the overnight surge to a new record high in the price of crude oil will cause OIH to break out as well:

In addition to the Oil Service ETFs, remember that the U.S. Oil Fund (USO) is an exchange traded fund that roughly follows the price of crude oil, although not in lockstep. Its composition has actually caused it to lag the price of crude lately, but it is still an easy and effective way to trade the price of crude oil without getting involved in futures contracts.

On the downside, it looks like the Retail Index ($RLX) will be the next sector to break down. With its 2.5% loss yesterday, the $RLX was one of the worst performing sectors. Like the Semiconductor Index a few days ago, the Retail Index has also broken down below its prior low from June 14 ahead of the major indices. This confirms the relative weakness in the sector. The daily chart of the $RLX below illustrates yesterday’s break of support:

Because the index is breaking down and showing relative weakness to the broad market, we now like that sector on the short side. Therefore, we will be stalking the Retail ETFs for possible short sale entries on any bounce into resistance. This, of course, is always a better bet than chasing a stock or ETF lower. When selling short, patience to wait for the proper entry price is crucial. The Retail HOLDR (RTH) is the most popular of the retail ETFs, but there are several others. Check out the free Morpheus ETF Roundup for a complete list of ETFs in that sector.

As for the broad market, the technical picture is beginning to look pretty bearish again. The S&P 500 broke down and closed below its 200-day moving average again after holding above it for only eight days. The Nasdaq Composite also closed right at support of its June 28 low. A break below that will cause the first “lower low” to form since the uptrend began off the June 14 low. Throughout the late June rally, our intermediate-term view never changed from bearish, but our short-term bias had switched to bullish. However, both our short and mid-term biases are now firmly bearish.

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Today’s Watchlist:

There are no new setups for today. As mentioned above, we are stalking a few of the Retail ETFs for potential short sale entry, but the trigger price will depend on market conditions. Therefore, we will send an intraday e-mail alert if/when we enter any new positions today.

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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):
MDY short (300 shares — 200 from July 7 and 100 from July 10) –
sold short 137.69 (avg.), stop 140.39, target 130.40, unrealized points = + 1.53, unrealized P/L = + $459

Closed positions (since last report):

SLV long (100 shares from July 12 entry) –
bought 117.65, sold 114.34, points = (3.31), net P/L = ($333)

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

$40,848

Notes:


SLV gapped open above its trigger price yesterday, prompting us to use the MTG Opening Gap Rules. We subsequently bought SLV after it traded above its 20-minute opening high, but it sold off sharply later in the day. Per intraday e-mail alert, we made a judgment call to cancel the stop and just sell the position early in order to keep the loss minimal. We wanted to be “right or right out” in that trade, so there was no sense in keeping it overnight if it was not likely to close in positive territory on the first day of our entry.

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

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Edited by Deron Wagner,
MTG Founder and
Head Trader