Commentary:
Post-Fed indecision led to an erratic session last Friday, as stocks finished the week near the flat line. The major indices rallied out of the starting gate, reversing the previous day’s weak close and moving above Thursday’s highs, but the bears showed up after the first hour of trading. Stocks trended lower throughout the rest of the day, picking up downside momentum in the late afternoon, until the market bounced in the final thirty minutes. Small caps showed the most weakness, as the Russell 2000 Index fell 0.6%. Conversely, the blue chip Dow Jones Industrial Average slipped only 0.1%. Both the S&P 500 and Nasdaq Composite lost 0.2%, while the S&P Midcap 400 declined 0.3%. For the week, the S&P 500 was unchanged, the Dow Jones Industrial Average advanced 0.4%, and the Nasdaq Composite gained 0.5%. In June, the S&P 500 and Dow Jones Industrials lost 1.8% and 1.6% respectively. The Nasdaq held up much better, losing less than 0.1%.
Volume rose in both exchanges, causing both the S&P and Nasdaq to register bearish “distribution days.” Total volume in the NYSE increased 11% over the previous day’s level, while Nasdaq turnover was 14% higher. The Nasdaq volume moved back above its 50-day average level for the first time in five days, but it’s negative that it do so on a “down” day. NYSE volume was also above average. Market internals were negative by just a small margin. In both the NYSE and Nasdaq, declining volume exceeded advancing volume by just under 3 to 2.
Last Friday, we entered two new short positions that came across our radar: StreetTRACKS Capital Markets (KCE) and S&P Energy SPDR (XLE). The former is tied to the performance of the securities broker/dealer sector, while the latter is comprised of oil-related stocks. Upon noticing significant relative weakness in many individual broker/dealer stocks, looked at KCE and noticed a bearish pattern as well. Since closing below its 50-day MA on June 22, KCE has been unable to recover back above it. On Friday, we sold short KCE at 69.40, when it fell below the prior day’s low. It subsequently sold off sharply with the broad market, then bounced into the close. The trade is currently showing an unrealized gain of about 3/4 point:
The XLE short sale is a little more speculative, as it remains above both its 20 and 50-day moving averages. However, we noticed that many of the leading oil stocks have begun to show relative weakness since bouncing off their 50-day MAs. In the case of XLE, it is running into resistance of its prior uptrend line that it fell below on June 26. It is also forming the right shoulder of a “head and shoulders” chart pattern:
If XLE gets back above resistance of its prior uptrend line (annotated above), we can quickly close the trade for a small loss. If XLE moves back down to its 50-day MA, we will closely watch the price action in order to determine whether or not to take the small profit, or hold in anticipation of a continuation of the short-term weakness. All four of our open positions are now showing a marked-to-market gain, so we will focus on micromanaging those positions for maximum profits and minimum risk in the coming week.
Like the previous day, the S&P 500 attempted to climb back above its 50-day moving average last Friday, but failed to close above it. It was the fifth straight day the S&P 500 stalled at resistance of its 50-day MA, clearly illustrating how quickly a prior support level becomes the new resistance level after the support is broken:
The indecision and chop of Friday’s session is easily recognized by the long “wicks” both above and below the “body” of the last candlestick on the chart above. This type of formation indicates a tug-of-war between the bulls and bears was taking place, but without a clear winner. The Dow formed a similar candlestick pattern last Friday, as it bounced between support of its 50-day MA and resistance of its 20-day EMA. In the end, it settled right in the middle of the two important levels:
Going into this week, the Nasdaq remains the broad-based index with the most bullish chart. Over the past two days, the index has met resistance of its prior high, around the 2,626 area, but the index has held above its 20-day EMA. It is also still firmly above support of its 50-day MA:
If the Nasdaq manages to leap to a new closing high this week, above the 2,626 level, it will probably pull the discombobulated S&P back above its 50-day MA. Conversely, a firm close below the June low of 1,490 in the S&P, or a breakdown below the 50-day MA in the Dow, would likely cause the Nasdaq to again fail its bullish consolidation. But until either one of these scenarios occurs, be prepared for wild, choppy intraday action. Given that the stock market closes at 1:00 pm EDT tomorrow and is closed for Independence Day on Wednesday, today could be a real snoozer. Light volume days have a natural tendency to be choppy, and the recent indecision in the S&P certainly won’t help.
NOTE: The stock markets will close early, at 1:00 pm EDT on Tuesday, July 3. On Wednesday, July 4, the markets will be closed the full day. An abbreviated version of The Wagner Daily will be published on July 3, with no publication on July 4. Regular publication will resume on Thursday, July 5. Enjoy the holiday week!
Today’s Watchlist:
There are no new setups in the pre-market today. Instead, we will focus on micromanaging our four open positions for maximum profit and minimal risk.
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 = + 0.66, unrealized P/L = + $297
KCE short (200 shares from June 29 entry) – sold short 69.40, stop 71.28, target 65.40, unrealized points = + 0.70, unrealized P/L = + $140
XLE short (200 shares from June 29 entry) – sold short 69.38, stop 71.18, target 65.20, unrealized points = + 0.39, unrealized P/L = + $78
** SDS long (250 shares from June 22 entry) –
bought 52.91 (avg.), stop 51.63, target 56.46, unrealized points = + 0.21 (including dividend), unrealized P/L = + $53
Closed positions (since last report):
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(none)
Current equity exposure ($100,000 max. buying power):
- $58,720
Notes:
Per intraday e-mail alert, we entered both KCE and XLE short last Friday. Entry, stop, and target prices listed above.
** 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