Commentary:

The bears slightly grabbed the upper hand of the tug-of-war that began a few days ago, but the modest sell-off enabled the major indices to remain within their trading ranges. Stocks gapped modestly higher on the open, sold off in the morning, traded in a sideways range for three hours, then made another leg down in the afternoon. Small-caps and the Nasdaq again showed the most relative weakness, as the Russell 2000 lost 0.9% and the Nasdaq Composite ticked 0.6% lower. Not surprisingly, large caps fared much better. The Dow Jones Industrial Average eked out a gain of 0.2%, while the S&P 500 slipped 0.2%. The S&P Midcap 400 was lower by 0.4%. Most of the major stock market indexes finished in the bottom third of their intraday ranges. The Dow closed in the middle of its range.

Total volume in the NYSE was 2% lighter than the previous day’s level, but a 15% increase in the Nasdaq turnover caused the index to register a bearish “distribution day.” It was the second day of institutional selling within the past three sessions, and the third within the past two weeks. The S&P, however, has only had one day of higher volume losses during the same period. Market internals were negative, but not terribly so. In both exchanges, declining volume exceeded advancing volume by just over 3 to 2.

Since breaking out in the middle of April, we have been stalking the Pharmaceutical HOLDR (PPH) for a long entry on its first correction. After consolidating for several weeks, PPH moved lower on May 10, but closed at support of its 20-day exponential moving average. As strong stocks and ETFs usually do, it bounced off that level the following day, and held up yesterday as well. As long as the broad market continues to hold up, PPH should now be ready to resume its intermediate-term uptrend by moving to a new high in the coming days:

The 20-day EMA often provides the support that enabled stocks and ETFs to resume their primary trends, but it is important to wait for confirmation of the trend resumption before buying. As such, we avoid buying on blind faith just because an ETF touches its 20-day EMA. Instead, we wait for the subsequent breakout above the short-term hourly downtrend line that typically develops whenever there is a pullback to the 20-day EMA. Waiting for such a breakout increases the odds of the uptrend continuing on to new highs, as it forces momentum to be on your side. In the case of PPH, the hourly downtrend line is currently around $85.07, just over yesterday’s high. We have illustrated this on the hourly chart below:

It’s beginning to look as though the broad market wants to consolidate and correct by time, rather than retracing significantly off its highs. Volatility has been rather high over the past week, but the prices of the major indices haven’t moved that much. Since they have moved sideways for the past week, the S&P and Dow are no longer “overbought” and riding the upper channel of their uptrend lines. As both indexes remain above their 20-day EMAs and are near the middle of their uptrending channels, they have not yet shown any technical signs of a significant retracement. Conversely, the Nasdaq Composite is in a precarious position. For the past three days, it has been testing support of the lower channel of its primary uptrend, as well as its 20-day EMA. A close below yesterday’s low would correspond to a break of both levels. Though the S&P and Dow look healthier, a technical breach of support in the Nasdaq would likely weigh on both indexes. For now, it’s a good idea to make sure all new long entries are S&P and Dow-related sectors, such as Pharmaceuticals, as opposed to those in the Nasdaq.

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Today’s Watchlist:

PPH – Pharmaceutical HOLDR
Long

Shares = 500
Trigger = 85.14 (above the hourly downtrend line)
Stop = 84.10 (below yesterday’s low)
Target = new high (will trail stop)
Dividend Date = Individual stock distribution on a regular basis

Notes = See commentary above for explanation of the setup.

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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):
XRT short (600 shares from May 4 entry) – sold short 42.90, stop 43.79, target 40.70, unrealized points = + 0.50, unrealized P/L = + $300

Closed positions (since last report):

(none)

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

$26,040

Notes:


We lowered the stop on XRT, which is beginning to follow-through to the downside.

Please check out the Wagner Daily Subscriber Guide to learn how to get the most from your subscription.

Edited by Deron Wagner,
MTG Founder and
Head Trader