Commentary:

The broad market traded in a narrow, sideways range yesterday, as stocks digested their recent gains. The major indices finished near the flat line as well. Both the S&P 500 and Dow Jones Industrial Average edged 0.1% lower, but the Nasdaq Composite was higher by the same percentage. Not surprisingly, small and mid-cap stocks showed a bit of relative weakness. The Russell 2000 lost 0.4% and the S&P Midcap 400 fell 0.7%. While both indices usually outpace the S&P, Dow, and Nasdaq on the “up” days, they also tend to retrace the most when the stock market pauses or corrects. Despite a relatively unchanged day in the broad market, many leading stocks continued breaking out and held on to their recent gains. This is a positive sign, as most broad market rally attempts in recent months lacked the leadership of strong individual stocks.

As we often see on consolidation days, turnover dropped off in both exchanges. Total volume in the NYSE declined by 12%, while volume in the Nasdaq was 3% lighter than the previous day’s level. It was positive that lower volume matched the flat market action because it indicates the bears did not sell into strength while the bulls took a break. Had volume been higher without a corresponding gain in price, it would have pointed to bearish “churning,” but that was not the case. In the NYSE, advancing volume marginally exceeded declining volume. The opposite was true in the Nasdaq.

In yesterday’s newsletter, we highlighted the Xinhua China 25 Index (FXI) as one of the international ETFs that has been showing relative strength. Upon doing further research last night, we discovered another international ETF that has also been acting well. The iShares Belgium Index (EWK) is perhaps not very well known, but it has been acting well nevertheless. For the past five weeks, it has been consolidating near its all-time high in a narrow range. As the weekly chart below illustrates, EWK is only 13 cents away from breaking out above its prior high that was set in May of this year. Notice also how the 50-week moving average (the teal colored line) has perfectly acted as support on several occasions since July of 2005:

Most likely, the consolidation of the past five weeks is creating a solid base for EWK to break out to a new high. When it does, you might consider buying the breakout and simply placing your stop just below the pivotal breakout level. Doing so would provide you with a very positive risk/reward ratio because stocks and ETFs trading at new record highs lack any type of overhead supply that acts as resistance.

The Nasdaq 100 Index Tracking Stock (QQQQ), which often acts as a barometer of the broad market’s health, finally rallied up to test resistance of its 200-day moving average. It was the first time in four months that QQQQ has touched its 200-day MA. The Nasdaq 100 still remains much further below its 52-week high than the S&P or Dow, but it has been catching up quickly:

Many industry sectors and leading stocks have been acting quite well over the past week, so it’s not likely the 200-day MA on QQQQ will trigger a sharp reversal to the downside. However, it does provide a good excuse for the bulls to take a break. We therefore expect to see a bit of sideways consolidation and perhaps a modest price retracement in the short-term. As long as the broad market correction is not too steep, it will provide a good chance to scoop up shares of strong ETFs and stocks that pullback or move into support of their primary uptrend lines. Overall, more sectors are now in uptrends than downtrends, especially the tech-related issues, but there are still a few pockets of weakness such as Utilities, Energy, and Gold/Silver.

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Today’s Watchlist:

There are no new setups for today, as we expect a bit of consolidation before most sectors move significantly higher.

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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):
XLU short (1,000 shares from September 5 entry) –
sold short 34.47, stop 35.18, target 33.20, unrealized points = + 0.49, unrealized P/L = + $490

XHB long (350 shares from September 13 entry) –
bought 32.85, stop 30.71, target 37.60, unrealized points = (0.01), unrealized P/L = ($4)

IWM short (400 shares from September 12 entry) –
sold short 71.41, stop 73.12, target 67.10, unrealized points = (1.08), unrealized P/L = ($432)

Closed positions (since last report):

(none)

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

$74,470

Notes:


No changes to the open positions.

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Edited by Deron Wagner,
MTG Founder and
Head Trader