Commentary:
The major indices began on a negative note yesterday, but shook off opening losses to finish the session modestly higher. The lethargic, range-bound intraday action was similar to the previous two sessions. The difference was that stocks opened lower this time instead of gapping higher. The S&P 500, Nasdaq Composite, and small-cap Russell 2000 indices each advanced 0.2%, while the Dow Jones Industrial Average eked out a gain of 0.1%. The S&P Midcap 400 maintained its relative strength by closing 0.5% higher. Each of the broad-based stock market indexes finished near their intraday highs.
Turnover tapered off again, causing volume in both exchanges to remain below average levels. Total volume in the NYSE was 9% lower than the previous day’s level, as volume in the Nasdaq declined by 3%. Usually, it’s better if higher volume matches the “up” days because it indicates institutional accumulation. However, the small gains of the past two days occurred within the context of a bullish consolidation at the highs, rather than uptrending days. As such, it’s actually positive that volume has been light. Increasing volume near the highs that lacks substantial price gains is bearish because it represents “churning” that occurs when institutions sell into strength. Therefore, we would not read too much into the light volume of the past two days. Market internals in both exchanges finished fractionally positive after recovering from negative levels earlier in the day.
After lengthy periods of consolidation, several ETFs that track a broad array of commodities are now poised for breakout. One of the first to market and perhaps the most well-known is the DB Commodity Index Tracking Fund (DBC). After rallying 0.9% yesterday, DBC closed at a new 10-month high. More importantly, it is about to breakout above its prior high on the weekly chart. Take a look:
As you can see, $25.95 is the pivotal level of resistance. DBC probed a nickel above that level yesterday, but closed just two cents below it. If DBC rallies above yesterday’s high in today’s session, it will provide us with an ideal entry point for purchase.
The iPath GSCI Total Return Index (GSP) is another commodities-based ETF that bears a similar chart pattern. Largely because GSP is a newer issue than DBC, it has a lower average daily volume than DBC. However, it also has a higher ATR (average true range), therefore giving traders more “bang for the buck.” As with DBC, a rally over yesterday’s high is the ideal entry point to buy GSP:
Since all ETFs are synthetic and not directly driven by supply and demand, liquidity is never an issue with GSP (or any other ETF). Nevertheless, you may want to use limit orders if the bid/ask spread is wide.
The Semiconductor HOLDR (SMH) is one of two ETFs that we bought within the past week. As you may recall, we bought SMH on May 31 when the Semiconductor Index ($SOX) bounced off support of its weekly uptrend line and rallied back above its 50-day moving average. Since then, SMH has been consolidating in a tight range, holding above its 20-day EMA that it gapped above on June 1. If it holds above that 20-day EMA, SMH should break out above its short-term range within the next several days, then rally to at least test its mid-May high. We remain long in anticipation of such a scenario, though we presently have a protective stop just below the 50-day MA to protect against failure of the reversal:
In addition to SMH, we are also holding a long position in the First Trust Biotech (FBT). We bought FBT, which loosely follows the AMEX Biotech Index ($BTK), when it gapped up above its intermediate-term downtrend line on May 31. Since then, the lack of follow-through has been a bit disappointing, but it closed yesterday at support of both its 20-day EMA and prior downtrend line. Most novice technical analysts know that the lower channel of an steady uptrend provides price support on a pullback, but many beginning traders forget the most basic tenet of technical analysis — a prior resistance level always becomes the new support level after the resistance is broken. In this case, both the prior downtrend line and 20-day EMA acted as resistance a week ago. However, both of those levels should now provide support on a pullback. If they don’t, we want to exit the trade quickly because that is a bearish sign of a failed reversal. We have circled support of the prior downtrend line and 20-day EMA on the daily chart of FBT below:
On a technical level, nothing has changed with the broad market. Each of the major indices remain squarely within their uptrending channels, while the short-term consolidation of the past several days is bullish. With the current uptrend entering its third straight month, the market could easily pull back at any time, without warning. Yet, the 20-day EMAs are well below the current prices of the S&P, Dow, and Nasdaq. Stocks could handle a decent pullback from here and still see no major violations of trendline support. Quite simply, the trend remains “up” until the major indices prove otherwise.
Today’s Watchlist:
DBC – DB Commodity Index Tracking Fund
Long
Shares = 400
Trigger = 26.07 (above the high of the consolidation)
Stop = 25.18 (below convergence of 20 and 50-day moving averages)
Target = new high (will trail stop)
Dividend Date = n/a
Notes = See commentary above for explanation of the setup.
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):
-
SMH long (400 shares from May 31 entry) – bought 36.72, stop 35.72, target new high (will trail stop), unrealized points = + 0.17, unrealized P/L = + $68
FBT long (600 shares from May 31 entry) – bought 25.74, stop 25.18, target new high (will trail stop), unrealized points = (0.22) unrealized P/L = ($132)
FXI short (100 shares from May 25 entry) – sold short 111.91, stop 115.85, target 100.30, unrealized points = (2.39), unrealized P/L = ($239)
Closed positions (since last report):
-
(none)
Current equity exposure ($100,000 max. buying power):
- $41,498
Notes:
No changes to the open positions above.
Edited by Deron Wagner,
MTG Founder and
Head Trader