Commentary:
The major stock market indexes recouped about half of the previous day’s losses last Friday, but turnover fell to its lowest levels in months. The S&P 500 gained 0.6%, the Dow Jones Industrial Average 0.5%, and the Nasdaq Composite 0.8%. The small-cap Russell 2000 was also higher by 0.8%, as the S&P Midcap 400 advanced 0.7%. Most of the gains were the result of upside opening gaps, as stocks subsequently chopped around in a sideways range throughout the entire day. Each of the major indices closed in the upper third of their intraday ranges.
Last Friday’s gains were undermined by the fact that volume in both exchanges receded substantially. Total volume in the NYSE was 30% lighter than the previous day’s level, while 36% less shares traded hands in the Nasdaq. The Nasdaq’s 1.5 billion shares was the lowest volume day the exchange has seen so far this year. Volume in both exchanges was obviously below average levels. Considering that both the S&P and Nasdaq dropped on higher volume in the preceding session, the light volume bounce tells us the sellers merely took a break, rather than institutions stepped in to buy the pullback. With six “distribution days” over the past four weeks, the Nasdaq really needs to score some high volume gains in order to start looking healthy again. Nevertheless, market internals were solid. In both the NYSE and Nasdaq, advancing volume exceeded declining volume by a ratio of approximately 3 to 1.
As we enter the last week of the month, you may want to keep an eye on the performance of the Semiconductor Index ($SOX). In the beginning of last week, we mentioned how the $SOX had retraced down to support of its breakout level and was potentially setting up for buy entries the sector. As such, we bought the Semiconductor HOLDR (SMH) the following day because it began to reverse higher after bouncing off support of its 20-day exponential moving average. Unfortunately, the $SOX index failed to hold support, so we stopped out of SMH the following day. To our surprise, the $SOX slid even lower over the next several days, finishing the week below its 50-day moving average. Worse is that the $SOX has also retraced nearly all of the gain from its mid-April breakout. The daily chart below illustrates how the $SOX began to roll over last week:
Although the daily chart looks ugly, the $SOX is actually sitting at support of its primary uptrend line on the longer-term weekly chart:
This analysis of the $SOX is a good example of how stocks and indexes often have conflicting signals within the various timeframes. In this case, the daily chart is now looking bearish, but the weekly chart is simply showing a pullback to support of the 10-month uptrend line. As a rule of thumb, we prefer to enter positions in which the short, intermediate, and long-term charts all confirm one another. The more timeframes that show the same trend bias, the stronger the actual trend of the stock or index. But what happens when one timeframe looks good, but another doesn’t? Most of the time, the longer-term trend prevails. If that holds true with the $SOX, the index could see a bounce off support of its weekly uptrend this week, despite the daily chart looking weak. If, however, the $SOX breaks support of its weekly uptrend line, the bearish daily chart will put a lot of pressure on the index.
As for the broad market, we feel stocks will likely see a continuation of the short-term correction that began in the middle of last week. Remember that last Thursday’s sell-off was pretty bearish beneath the surface, particularly with regard to the distribution. If the stock market had followed up with a day of higher volume gains on Friday, it would certainly cause us to have a more positive bias to the start of this week. Conversely, stocks bounced on extremely light volume. The key will be whether or not the major indices are able to hold support of their May 24 lows. A break below those lows would cause the S&P to close below support of its 20-day EMA, and would put the Nasdaq back below its 20-day EMA as well.
Today’s Watchlist:
There are no new setups in the pre-market 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):
- FXI short (100 shares from May 25 entry) – sold short 111.91, stop 115.85, target 100.30, unrealized points = (0.13), unrealized P/L = ($13)
XME short (150 shares from May 25 entry) – sold short 64.10, stop 66.71, target 57.70, unrealized points = (0.62), unrealized P/L = ($93)
Closed positions (since last report):
-
(none)
Current equity exposure ($100,000 max. buying power):
- $20,912
Notes:
Edited by Deron Wagner,
MTG Founder and
Head Trader