Commentary:
Stocks traded in a narrow, sideways range for the second consecutive day, as the broad market continued to digest last Wednesday’s rapid ascent. Each of the major indices closed higher, but none by a significant margin. The S&P 500 edged 0.1% higher, while both the Nasdaq Composite and Dow Jones Industrial Average gained 0.2%. The small-cap Russell 2000 also advanced 0.2%, as the S&P Midcap 400 rallied 0.3%. Throughout both the recent sell-off and subsequent market recovery, mid-cap stocks have clearly shown the most relative strength. Each of the major indices finished at their highest levels of the week. Both the S&P 500 and Nasdaq Composite zoomed 3.5% higher last week, but are still off their February highs by 1.7% and 3.0% respectively.
Turnover declined for the second consecutive day, though that is common during periods of price consolidation. Total volume in the NYSE declined by 14%, while volume in the Nasdaq was 15% lower than the previous day’s level. It was the Nasdaq’s second lightest volume day of the year. In both exchanges, volume was also well below average levels. Advancing volume in the NYSE modestly exceeded declining volume by a margin of 3 to 2. The Nasdaq ratio, however, was neutral.
One ETF we will be watching closely is the iShares Xinhua China 25 (FXI). This was one of the biggest gainers of all ETFs last year, but FXI has been in correction mode since the beginning of January. As you may recall, we recently netted a large profit by being short FXI ahead of the 9% drop in the Shanghai market that triggered the global sell-off on February 27. The original reason for short entry was the failed breakout of the “symmetric triangle” chart pattern and subsequent close below the 50-day MA on February 23. While we expected a decent correction at the time, we were pleasantly surprised that FXI hit our downside price target only two days later. Since then, FXI has been recovering off its low, but has run into resistance of its 50-day moving average in each of the past three sessions. As we often see, resistance of its primary downtrend line has converged with that 50-day MA as well. The confluence of resistance is circled on the daily chart of FXI below:
Because FXI is at such a pivotal area of resistance, this “make it or break it” level should result in a swift move in either direction in the coming days. Whether FXI “makes it” or “breaks it” is important because many of the international markets have been following the direction of the Shanghai market in recent months. Therefore, if FXI is able to convincingly close above both its downtrend line and 50-day MA, it could set a bullish tone for the global markets in the short-term. It would also create a nice momentum trade setup for long entry in FXI. We like a long entry above the March 21 high of 104, with an initial price target of at least the February 22 high of 108.50. Your protective stop on such a short-term momentum-based trade should be not much lower than the 50-day MA (which should become the new support if FXI breaks out).
Before you begin to plan your strategy for long entry in FXI, there’s one major point to remember — we must always assume that trends will remain intact until the market proves otherwise! FXI has been in a downtrend since the high of January 3, and there is not yet any valid technical reason to believe the trend is ready to reverse. As we also said about the U.S. markets last week, a rapid correction of the strong magnitude we saw from February 27 through March 5 rarely ends only a few weeks later. Usually, it takes at least two to three months for any market to absorb all the overhead supply. For that reason, we can’t help but think that FXI will at least test support of its March 5 low (and 200-day MA) before moving much higher. If it tests that March 5 low and holds, it would create a double bottom formation that significantly decreases the risk of buying FXI above its downtrend line.
Whether you plan to trade FXI or not, we suggest closely monitoring its price action this week. The way it reacts at this key resistance level could tell us more about the short-term direction of the U.S. stock market than we realize. Remember it was the February 27 collapse in the Shanghai market that triggered the large losses in the U.S. markets later that day. The S&P, Nasdaq, and Dow have certainly recovered much of their losses and have been acting well for the past several days, but we’re not out of the woods yet. Technically, the intermediate-term downtrends remain in effect, though the short-term has been bullish.
Today’s Watchlist:
There are no pre-market setups, although we continue to stalk OIH (Oil Service) for possible long entry on a pullback to support. We are also watching FXI for potential entry in either direction. As always, we will send an e-mail alert to inform you of any intraday decisions.
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:
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Open positions (coming into today):
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IYR short (275 shares from March 13 entry) – sold short 85.75, stop 88.69, target 78.30, unrealized points = (1.30), unrealized P/L = ($358)
Closed positions (since last report):
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(none)
Current equity exposure ($100,000 max. buying power):
- $23,939
Notes:
No changes to the open position.
Edited by Deron Wagner,
MTG Founder and
Head Trader