Commentary:
Stocks attempted to follow-through on the previous day’s bounce, but a moderately negative reaction from the afternoon Fed announcement on interest rates reversed the morning rally. As widely expected, the Federal Reserve Board left interest rates unchanged, but maintained that inflationary risks are still a reality. The broad market initially spiked to new intraday highs as a knee-jerk reaction, but sentiment turned sour in the final hour of trading. The Nasdaq surrendered an early gain of 0.7% to close only 0.1% higher. The small-cap Russell 2000 and S&P Midcap 400 indices both advanced 0.1% as well. The S&P 500 and Dow Jones Industrial Average were each unchanged. Each of the major indices settled near their intraday lows.
Curiously, turnover declined across the board. Total volume in the NYSE was 15% lower than the previous day’s level, while volume in the Nasdaq declined by 5%. Volume typically surges higher in the final ninety minutes of Fed days, but turnover on the day still failed to rise. Compared to most FOMC meetings, the market’s initial reaction was relatively muted. However, stocks often don’t show their real reaction until several days later. In both exchanges, advancing volume exceeded declining volume by just a fractional margin.
Yesterday, the price of crude oil rose above the psychologically significant $70 level in the late morning, causing the U.S. Oil Fund (USO) to gap above the high of its recent consolidation above its 200-day MA. We bought the breakout in USO yesterday, but scratched the trade later in the day when crude failed to hold above its breakout level. There’s no sense taking a potentially failed breakout overnight on the initial day of entry, as one can always re-enter the next day if the breakout confirms:
In this morning’s pre-market session, the Crude Oil Continuous Contract (CL) is back above $70 and its prior high from June 19. If it holds and moves back to yesterday’s high, we may take another shot at USO. Ironically, many individual oil and oil service stocks may actually be forming bearish topping patterns. The S&P Energy SPDR (XLE) bounced off support of its 50-day MA two days ago, but ran into resistance of its prior uptrend line that it fell below on June 26. Based on that indication, oil-related issues may have a tough time going higher in the near future. Nevertheless, the price of crude oil (and USO) is not always directly correlated to the movement of oil stocks.
As it did on June 25, the S&P 500 spiked above its 50-day moving average on an intraday basis, but failed to close above it. In each of the past four sessions, prior support of the 50-day moving average has acted as the new resistance level. A few days ago, we discussed how prior support usually becomes the new resistance after the support level is broken. Yesterday’s action was another example of this:
If the S&P manages to rally above yesterday’s high, it would be very bullish and could help send the relatively strong Nasdaq to fresh highs. Conversely, a close below yesterday’s low would help solidify new resistance of the 50-day moving average and would likely trigger a sell-off that would break the June lows. With the Nasdaq trying to show resiliency and the S&P doing the opposite, we must be prepared for at least a short-term continuation of erratic, choppy market conditions.
Today’s Watchlist:
There are no new setups in the pre-market today. Let’s let the market digest the Fed meeting and see which way it wants to go at this crossroad, rather than anticipate its next direction.
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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EWO short (450 shares total – 300 shares from June 6, 150 shares from June 20) –
sold short 40.68 (avg.), stop 40.83, target 37.75, unrealized points = + 0.83, unrealized P/L = + $374
** SDS long (250 shares from June 22 entry) –
bought 52.91 (avg.), stop 51.63, target 56.46, unrealized points = + 0.10 (including dividend), unrealized P/L = + $25
Closed positions (since last report):
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USO long (200 shares from June 28) – bought 52.65, sold 52.35, points = (0.30), net P/L = ($64)
Current equity exposure ($100,000 max. buying power):
- $31,077
Notes:
Per intraday e-mail alert, we bought USO when it broke out yesterday morning. However, we made a judgement call to scratch the trade into the close. We’ll watch for a potential re-entry if it confirms the breakout attempt.
** On June 26, SDS traded “ex-dividend” with a distribution of 0.43 per share, payable on July 2. When ETFs pay dividends during our holding period, we automatically lower the original stop and target prices by the amount of the dividend. The amount of the dividend is also added to our “unrealized points” and “unrealized gains” figures.
Edited by Deron Wagner,
MTG Founder and
Head Trader