A positive reaction to the afternoon release of the Fed minutes enabled stocks to shake off early weakness yesterday morning and finish the day modestly higher. At mid-day, both the S&P 500 and Nasdaq Composite were trading near their previous day’s lows and were off by 0.5% and 0.7% respectively. Volume was also coming in significantly higher, putting the market on track for a bearish “distribution day.” Fortunately for the bulls, that all changed when the Federal Reserve Board released their August minutes that indicated they are through with the two-year pattern of raising interest rates. The Nasdaq Composite reversed to a 0.5% gain, while both the S&P 500 and Dow Jones Industrial Average finished 0.2% higher. The small-cap Russell 2000 showed relative strength for a change, as the index rallied 1.2%. The S&P Midcap 400 gained 0.5%. Because the Russell closed above its 200-day moving average, we stopped out of our short position in the iShares Russell 2000 (IWM) for an average loss.
Analysis of yesterday’s volume pattern in the broad market shows that a tug-of-war between the bulls and bears was taking place. When the major indices were trading lower and at their worst intraday levels, volume in the NYSE was on pace to be 15% higher than the previous day’s level. Had stocks failed to reverse in the afternoon, the S&P 500 would have suffered its first “distribution day,” indicative of institutional selling, since August 9. Instead, stocks reversed course in the afternoon and volume increased even more. By day’s end, total volume in the NYSE had increased by 20%, while volume in the Nasdaq was 17% higher. Since the broad market closed higher, the volume surge enabled both the S&P 500 and Nasdaq Composite to register bullish “accumulation days” instead. It was the second straight day of higher volume gains in both exchanges, but we must once again point out that turnover remained below average levels. We hate to keep harping on it, but broad market moves in both directions should be taken in stride when minimal shares are trading hands over such an extended period. We will, however, soon know the true intentions of the “smart money,” as we expect volume levels to return to normal after Monday’s Labor Day holiday has passed.
Yesterday’s gains caused both the S&P 500 and Nasdaq Composite to finish at pivotal resistance levels of the highs of their recent consolidations. Any further buying pressure in the broad market could trigger the momentum necessary for both indices to break out above their two-week ranges. Conversely, traders are also very adept at trapping the bulls by selling into strength of probes above key resistance levels as well. Either way, the good news is that we should soon see resolution and a confirmed move in either direction out of the sideways range. It is time for the market to either “make it or break it.” This is apparent on the daily chart of the S&P 500 SPDR (SPY):
The ever-popular Nasdaq 100 Tracking Stock (QQQQ) has been trading in a similar pattern to the broader-based Nasdaq Composite. As with SPY, it is also decision time for QQQQ (aka the “cubes”). However, note that the Nasdaq 100 (and the Composite) has a lot more overhead supply to contend with:
Although we have had bearish ETF positions on the broad market lately, please be assured that, like most professional traders, we really don’t care which direction the stock market goes. Instead, we focus on consistently putting the odds in our favor by simply trading in the direction of the primary trends. The S&P and Dow broke out of their multi-month downtrends a few weeks ago, but the Nasdaq remains below both its prior high from last month and its 200-day moving average; hence the short positions in the Russell 2000 and S&P Midcap 400, both of which tend to trade in sync with the Nasdaq. If all the major indices begin to break out and higher volume confirms, you can be certain we will quickly flip to the bullish side and focus on buying ETFs with the most relative strength. But until that happens, we are avoiding entering new positions and are focusing only on managing our existing ones. Consistently profitable traders always trade what they see, not what they think!
There are no new setups in the pre-market today. Until after the Labor Day holiday has passed and volume returns to the market, we will likely just focus on managing our existing open positions instead of entering new ones.
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):
MZZ long (250 shares from August 23 entry) –
bought 73.03 (avg.), stop 70.29, target 77.20, unrealized points = (0.97), unrealized P/L = ($243)
IYR short (400 shares from August 23 entry) –
sold short 74.52, stop 76.10, target 69.80, unrealized points = (0.98), unrealized P/L = ($392)
Closed positions (since last report):
IWM short (250 shares from August 1 entry) –
sold short 68.65, covered 71.17, points = (2.52), net P/L = ($635)
Current equity exposure ($100,000 max. buying power):
IWM hit our stop yesterday, but no changes to the IYR and MZZ positions.
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Click here to view MTG’s past performance results (updated monthly).
Edited by Deron Wagner,
MTG Founder and