Stocks concluded a strong week with another session of gains last Friday, as the S&P 500 approached resistance of its 52-week high. The market gapped firmly higher on the open, but drifted sideways to lower thereafter. The S&P 500, Nasdaq Composite, and Dow Jones Industrial Average each gained 0.3%, while the small-cap Russell 2000 advanced 0.2%. The S&P Midcap 400 Index was the only broad-based index we follow that finished lower, but it lost only 0.1%. The Nasdaq gave back much of its intraday gain, but still managed to close higher for the sixth consecutive day.
Despite strength in most sectors, the S&P Select Utilities SPDR (XLU) still lost 0.7%, pushing our short position further into the plus column. XLU also closed below its 50-day moving average for the first time since May 24 of this year, so a change in bias is definitely taking place in the Utilities sector. Our long position in the StreetTRACKS Homebuilders (XHB) is also working well, as XHB rallied 2.1% on Friday and closed at its highest price since July 3. The iShares Russell 2000 (IWM) short position is still against us, but remains below our original stop.
Turnover in both exchanges surged to its highest levels in months last Friday, but much of the volume increase can be attributed to the quarterly “quadruple witching” options expiration day. Total volume in the NYSE increased by a humongous 51% over the previous day’s level, while volume in the Nasdaq was 33% higher. On the third Friday of the last month of each calendar quarter, stock index futures, stock index options, stock options and single stock futures (SSF) all simultaneously expire. The associated closing of stock positions in the market typically results in a volume spike on every such “quadruple witching” day. Nevertheless, the gains on higher volume caused both the S&P and Nasdaq to register bullish “accumulation days.” The only negative was that each of the major indices closed near the bottom third of their intraday ranges. This tells us that much of the rise in turnover may have been attributed to institutions selling into strength of the opening gap up.
Over the past few weeks, we have been discussing the weakness in oil-related ETFs, particularly the short position in the S&P Select Energy SPDR (XLE) that the Morpheus Capital fund recently profited from. If you are still short any of the energy ETFs, you are probably sitting on a nice profit, but you may want to consider lowering your stop to just above Friday’s highs in order to protect your gains. The main reason we suggest this is the bullish “hammer” candlestick formation that has formed on the daily chart of crude oil. Note the “hammer” on the chart of the U.S. Oil Fund (USO), which loosely mirrors the price of crude oil. Also notice the high volume in last Friday’s session, often indicative of a climatic move to the downside:
More of my thoughts on the technical state of oil appear in the Exchange Traded Funds section of today’s Investors Business Daily newspaper. You can read the article by clicking here.
After the first hour of last Friday’s session, the S&P 500 was trading within 0.2% of its 52-week high that was set back in May, but the rally fizzled out later in the afternoon. Still, it is likely that traders will at least make another test of the 52-week high in the coming week. Whether or not the index manages to actually close at a new high is the big question, but we should at least see an intraday probe above the high. The horizontal line on the daily chart below marks the magic number of that resistance level:
When an index is trading near a pivotal support or resistance level, trading conditions often become erratic and whippy. As such, you may want to hold off a few days on entering new trades on both sides of the market until we see how the S&P reacts near this closely-watched level. As long as stocks continue to consolidate near their highs, there is no need to take profits on any long positions, but you should at least consider trailing your stops tighter. In situations such as these, we like to use the hourly timeframe and place protective stops just below support of the hourly uptrend lines on long positions. As for short positions, don’t be sloppy with your stops because a new high in the S&P could instantly trigger a lot of bullish momentum that propels stocks much higher. If short, just be sure you are in sectors with relative weakness, such as Utilities or Energy, as these would be the last sectors to move higher if the market does.
There are no new setups for today, as we expect a bit of consolidation before most sectors move significantly higher.
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 34.74, target 33.20, unrealized points = + 0.75, unrealized P/L = + $750
XHB long (350 shares from September 13 entry) –
bought 32.85, stop 30.71, target 37.60, unrealized points = + 0.69, unrealized P/L = + $242
IWM short (400 shares from September 12 entry) –
sold short 71.41, stop 73.12, target 67.10, unrealized points = (1.25), unrealized P/L = ($500)
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
We lowered the stop on XLU, but no changes to the stops on IWM or XHB today.
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