Stocks immediately sold-off out of the starting gate yesterday, but promptly found support and traded in a non-committal, sideways range throughout the rest of the session. Both the S&P 500 and Dow Jones Industrial Average lost 0.6%, while the Nasdaq Composite fell 0.7%. The small-cap Russell 2000 and S&P Midcap 400 indices were lower by 0.8% and 0.5% respectively. Although each of the major indices posted significant losses, all except the Russell 2000 held above their previous day’s lows. Yesterday’s relative weakness in small-caps is noteworthy because the Russell often leads the broad market in both directions. A violation of the intraday low of Monday’s bullish reversal in the Russell is not a good sign for stocks. We’ll be watching closely to see how the index acts on a test of its 50-day MA support, just a few points below yesterday’s low:
The one positive of yesterday’s broad-based losses was that they occurred on lower turnover. Total volume in the NYSE was 6% lower than the previous day’s level, while the Nasdaq volume receded by 3%. Yesterday’s losses were diversified among nearly every industry sector, but the selling was orderly and not indicative of panic selling. Conversely, substantially higher volume would have pointed to institutional distribution that could easily put the market’s recent gains in jeopardy.
One ETF that is setting up for a possible breakout is the StreetTRACKS Gold Trust (GLD), which mirrors the price of the spot gold commodity. Below is a daily chart of GLD:
Since forming a peak in late February, GLD has been in correction mode. The initial drop from its high was volatile and choppy, but the price action has stabilized firmly over the past several weeks. After dipping below support of its 50-day MA twice earlier this month, GLD has moved steadily back above it. A tight, sideways consolidation has formed over the past week, with convergence of the 20 and 50-day moving averages now providing support below. With a minimal amount of overhead supply to hold it down, a breakout above the high of its five-day consolidation should enable GLD to quickly zoom back up to at least test its February high. A subsequent breakout to a new 52-week high is not a long-shot either. Regular subscribers to The Wagner Daily will see our trigger, stop, and target prices for the GLD setup below.
Last week, we mentioned that we were stalking the Oil Service HOLDR (OIH) for potential long entry because the Oil Service Index ($OSX) had broken out of a base of consolidation. In order to reduce our buying risk, we were looking for a pullback in OIH, but the sector has not yet given us one. It has, however, begun to consolidate at its high (“correction by time”). OIH continues to show excellent relative strength, so a pullback to support of its hourly uptrend line, around $143, would provide a low-risk entry. Alternatively, we would consider buying a breakout above the high of its current consolidation, but we would first like to see it move in a sideways range for a few more days.
On the downside, the iShares DJ Real Estate Index (IYR) is beginning to follow-through nicely. As you may recall, we sold short IYR on March 13 when it began to follow-through on the “bear flag” chart pattern from its short-term bounce off the low. It subsequently held the March 5 low and moved back up to test its “swing high” from March 12, but rolled over after probing above it. Now, IYR is back to the lower channel support of its short-term uptrend, but a resumption of the intermediate-term downtrend should cause it to break down to new lows within the next several days. If that occurs, IYR should rapidly slide down to its 200-day MA. Looking at the daily chart below, notice how IYR is so weak that it lacked the power to rally back to its 50-day MA:
Like the small-cap Russell 2000 Index, the Securities Broker-Dealer Index ($XBD) showed relative weakness by closing yesterday at its intraday low of the prior day. Because the broker-dealers, along with other financials, was one of the sectors that largely fueled the February 27 sell-off, we’ve been paying attention to their performance since last Wednesday’s post-Fed rally. The $XBD is to the S&P 500 what the $SOX is to the Nasdaq — a heavily weighted industry sector that often leads the entire broad-based index. If the $XBD begins to roll over again, we would be very surprised if the S&P does not follow it. Though we typically discuss ETFs instead of individual stocks, you may want to keep Goldman Sachs (GS) on your daily watchlist because we’ve noticed it has become an accurate barometer for not only the $XBD index, but the health of the S&P 500 as well. Since the March 21 rally, GS has been forming a very interesting chart pattern. It’s been consolidating in a tight, sideways range, just above the 50-day MA, which is bullish. However, the gap from February 27 has been acting as resistance. We expect GS to make a decisive move within the next day or two, the direction of which will have a major bearing on the entire broad market:
With the S&P 500 sitting on pivotal support of its 50-day moving average, but just below resistance of its February 27 high, we must be prepared for a rapid move in either direction. Continually monitoring the relationship between the price and volume of the S&P and Nasdaq is one of the most accurate ways to know what is happening “under the hood” of the stock market. Be prepared for potential volatility this morning, as Federal Reserve Chief Ben Bernanke is scheduled to testify to Congress at 10:30 am EDT. Traders and investors will be looking for more clarification and/or confirmation of last Wednesday’s interest rate announcement that sparked a strong rally.
GLD – StreetTRACKS Gold Trust
Shares = 400
Trigger = 66.21 (above the March 22 high)
Stop = 64.18 (below support of the 20/50 MA convergence)
Target = new 52-week high (will trail a stop)
Dividend Date = n/a
Notes = Per the above commentary, we are stalking GLD for a potential long entry today.
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):
IYR short (275 shares from March 13 entry) – sold short 85.75, stop 88.69, target 78.30, unrealized points = + 0.76, unrealized P/L = + $209
DXD long (350 shares from March 27 entry) – bought 58.30, stop 56.78, target 63.10, unrealized points = (0.10), unrealized P/L = ($35)
FXI short (200 shares from March 26 entry) – sold short 101.87, stop 105.60, target 89.60, unrealized points = (0.43), unrealized P/L = ($86)
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
Per intraday e-mail alert, we bought DXD yesterday. IYR beginning to follow-through nicely. No changes to the open positions.
Edited by Deron Wagner,
MTG Founder and