Commentary:
Stocks followed through on the previous day’s strength in Tuesday’s holiday-shortened session, enabling the Nasdaq to close at another new six-year high. The Nasdaq Composite gained 0.5%, the S&P 500 advanced 0.4%, and the Dow Jones Industrial Average closed 0.3% higher. Both the small-cap Russell 2000 and S&P Midcap 400 indices rallied 0.4%. The Nasdaq finished at its intraday high, while the other major stock market indexes settled in the upper quarter of their intraday ranges.
As one would expect in a session that closed three hours early, turnover in both exchanges fell sharply. Total volume in both the NYSE and Nasdaq was 44% lighter than the previous day’s level. Even factoring out the early close, trading was still on track to come in much lighter. When institutional trading participation is lacking, it doesn’t take a lot of volume to move the market in one direction or the other. Therefore, we caution you against placing too much importance on the market’s gains of the past two days. Certainly, it was positive that the S&P 500 moved back above its 50-day MA and the Nasdaq closed at a new high. However, buying stocks and ETFs will be much safer if those gains are retained when the mutual funds, hedge funds, pension funds, and other institutional traders return to the scene today.
After a false start two weeks ago, the Nasdaq 100 Tracking Stock (QQQQ) firmly closed at a new six-year high:
The dashed horizontal line on the chart above marks the pivotal breakout level that should now act as support on any pullback. When an index is in new high territory, there is a lack of overhead supply that usually enables them to continue higher. Therefore, any retracement down to the breakout level, around the $47.90 to $48 area, constitutes a low-risk buy entry. Tuesday’s low of $48.04 should also act as support. If QQQQ pulls back today, we will be looking for a potential long entry. The caveat, however, is that any retracement should be on relatively light volume. If turnover surges sharply higher on a pullback, it would be indicative of bearish distribution.
The Semiconductor HOLDR (SMH) has been consolidating near its high of the past three weeks, but we are more hesitant to buy a potential breakout. Recent price action in SMH has been erratic, so there is a greater chance of getting chopped up and stopped out. As you may recall, we bought a very strong breakout from a “cup and handle” pattern and to a new high on June 21. Three days later, SMH had not only failed the breakout, but also dropped to below the low of the breakout day. The next day, it zoomed back to within 26 cents of the June 21 high, only to retrace nearly two-thirds of that move two days later. It has tightened up a bit over the past two days and it’s still not a bad idea to buy a breakout above the June 21 high. Just be aware that its recent price action has been challenging:
While the Nasdaq brothers have been acting well, the biggest area of concern remains the relative weakness in the broad-based S&P 500. Granted, the recent strength in the Nasdaq pulled the S&P back above its 50-day MA. However, it did so in two days of much lighter than average volume that preceded the holiday. Again, we’ll feel a lot more comfortable jumping back on the long side of the market after stocks prove they will retain their gains when the “smart money” begins returning today. There is still a considerable amount of overhead supply the S&P must contend with before moving back to a new record high. The big picture remains pretty much the same as it has been for weeks. Buy the tech sectors of the Nasdaq, but avoid the ambiguity of the chart patterns in the S&P and Dow. Shorts in the S&P and Dow to hedge long positions in the Nasdaq are not a bad idea.
Today’s Watchlist:
There are no new setups in the pre-market today. We’re stalking QQQQ for a potential entry today, but want to first assess broad market conditions before doing so. We are also considering SMH long, depending on the price action of its leading stocks. Watch for intraday e-mail alerts if/when we buy any new positions 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:
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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 (see note below), target 37.75, unrealized points = (0.03), unrealized P/L = ($13)
KCE short (200 shares from June 29 entry) – sold short 69.40, stop 71.28, target 65.40, unrealized points = (1.18), unrealized P/L = ($236)
XLE short (200 shares from June 29 entry) – sold short 69.38, stop 71.18, target 65.20, unrealized points = (1.37), unrealized P/L = ($274)
Closed positions (since last report):
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(none)
Current equity exposure ($100,000 max. buying power):
- $46,586
Notes:
We will be using the MTG Opening Gap Rules to manage the EWO position. Since it closed so close to its stop, this gives us a bit of wiggle room, but without large risk. The stop will either become 10 cents over the 20-minute high OR the original stop of 40.83, whichever is greater.
Edited by Deron Wagner,
MTG Founder and
Head Trader