The Wagner Daily

Commentary:

As anticipated, stocks gapped lower on the open, then sold off further throughout the morning, but buying programs in the final hour of trading wiped out much of the market’s earlier losses. The Nasdaq Composite trimmed its intraday loss from 1.4% to just 0.5%. The S&P 500 showed relative strength by finishing only 0.2% lower. The Dow Jones Industrial Average fell 0.4%, the small-cap Russell 2000 0.5%, and the S&P Midcap 400 0.3%. The Nasdaq and S&P both closed near their intraday highs, while the Dow lagged a bit.

Turnover rose across the board, causing both the S&P and Nasdaq to register a bearish “distribution day.” However, the late-day reversal and closing prices near their intraday highs calls into question the true amount of institutional selling that took place. Total volume in the NYSE surged 25% above the previous day’s level, but volume in the Nasdaq only increased 2%. In both exchanges, declining volume exceeded advancing volume by just under 2 to 1, not overly negative ratios.

In the July 17 issue of The Wagner Daily, we illustrated key support levels in the S&P, Nasdaq, and Dow. Yesterday, these areas of price support corresponded with the late-day reversals in both the S&P and Nasdaq. The Dow didn’t fall enough to test its primary support. Looking at the daily chart of the S&P 500 below, notice how the prior downtrend line that it broke out above on July 12 perfectly marked yesterday’s intraday low:

We’re always saying that a prior resistance level becomes the new support level after the resistance is broken. The above is a clear example of such. Similarly, the Nasdaq also reversed after testing support of its prior high from July 9 that we pointed out on July 17:

In what could have turned into an ugly session, it’s obviously bullish that the major indices showed resilience yesterday. Most market-leading stocks also held up pretty well. Nevertheless, the broad market now has a bit of overhead supply to contend with. If the major indices zoom back to new highs today, that will no longer be a factor, but continued caution in today’s session would be prudent.

Over the past week, we have entered a diverse mix of six different ETF positions. So far, they’re working out pretty well. All but one of them is showing an unrealized gain since entry. Of the six trades, the Market Vectors Gold Miners ETF (GDX) is currently showing the largest profit.

After GDX broke out above its intermediate-term downtrend line and 50-day MA on July 6, we began stalking it for potential long entry. We bought our initial shares of GDX on July 10, at a price of $40.76, when it closed at support of its secondary uptrend line on the hourly chart. It subsequently consolidated for the next five days. On July 17, we added to the original position after GDX had corrected by time and moved into support of its primary uptrend line on the hourly chart. Yesterday, a sharp rally in the Gold and Silver Index ($XAU) enabled GDX to rocket 4.0% higher, making it the top performing ETF in the market. The daily chart below shows the steady uptrend since breaking out on July 6. The hourly chart that follows illustrates our two entry points:

Yesterday, we entered two new ETF trades. One of those positions was a long entry in the PowerShares Clean Energy Fund (PBW), which we recently analyzed as a potential trade entry in our July 16 commentary. Comprised largely of solar energy stocks, one of the hottest sectors in the market right now, PBW has been powering upwards since breaking out of consolidation late last month. After the initial breakout, we began looking for a pullback that would provide a low-risk entry point. A small retracement finally occurred over the last several days. We used yesterday’s pullback to support of its July 9 low as an entry point to buy a strong ETF into short-term weakness. PBW subsequently closed at its intraday high, forming a bullish “hammer” candlestick in the process. We expect a resumption of the primary uptrend within the next several days:

One thing you might notice about PBW is that it trades with a low ATR (average true range). Because it has such low volatility, an upward adjustment in share size is necessary in order for the trade to yield the same profit potential (and risk) as more volatile ETFs. When providing trade setups to subscribers, we not only detail the trigger, stop, and target prices, but we also list the number of shares we are entering based on our $50,000 model account. This enables traders to correspondingly adjust their portfolios so that similar risk and profit potential is taken with all positions, regardless of each ETF’s volatility.

In addition to GDX and PBW, we are positioned in the following ETFs: INP long, FXC long, IBB long, and RKH short. Below is an updated summary and technical view of each trade:

INP long – This international ETF, correlated to the Indian stock market, continues to consolidate at its high. It has been acting very well, maintaining the primary uptrend that began in March of 2007. After four days of tight price consolidation, it may be poised to set another fresh high. Since it’s at a new high, we have no specific price target. Instead, we will continually be trailing a stop higher in order to maximize the profit and protect the gain.
FXC long – Capitalizing on continued weakness in the U.S. Dollar, FXC tracks the relationship between the Canadian and U.S. Dollar. Like INP, it continues to consolidate at its high and has not given any sell signals since beginning its uptrend in March. Though the trade is showing us a profit, one thing we don’t like is the combination of its high price and low ATR. If a low-priced ETF has a low volatility, it’s not a big deal because one can compensate through increased share size. However, the mix of high price and low ATR means the trade takes up a lot of buying power, but offers minimal profit potential. As such, we may soon close this trade for a small gain, simply to put the capital to better use.
IBB long – We bought the iShares Nasdaq Biotech Fund (IBB) on July 13, when it broke out above both its 50-day MA and a three-month downtrend line. The only position not showing a profit, the initial reversal attempt failed. However, it found support at its 200-day MA yesterday and closed near its intraday high. Our stop is just below yesterday’s low, but we haven’t yet written this trade off.
RKH short – The only short position in our Wagner Daily ETF portfolio, the Regional Bank HOLDR (RKH) was entered yesterday. Banking has been one of the weakest sectors in the market for quite a while. RKH has been in a downtrend since peaking in February 2007. On July 17, RKH formed a bearish “inverted hammer” candlestick after running into convergence of its secondary downtrend line, 50-day MA, and 200-day MA. More importantly, it also bumped into major resistance of its prior weekly uptrend line that was formerly intact for more than four years. With such a confluence of overhead resistance, odds were good that RKH would be pressured to resume its downtrend. Therefore, we sold short RKH when it gapped below the July 17 low. At yesterday’s worst level, the short sale was showing an unrealized gain of nearly 3 points, but it recovered a bit into the close. As long as RKH remains below both its 50 and 200-day moving averages, there’s no reason to be concerned about the position.

Today’s Watchlist:

There are no new setups in the pre-market today. As we entered two new positions yesterday, we are now near our maximum buying power based on the $50,000 model account. Rather than looking for new trades, we will focus on managing our six open positions for the highest profitability while protecting gains.

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):

stop 40.76

unrealized P/L = + $516

INP long (200 shares from July 12 entry) – bought 63.07 (avg.), stop 60.28, target new high (will trail stop), unrealized points = + 0.79, unrealized P/L = + $158

FXC long (250 shares from July 6 entry) – bought 95.51, stop 93.54, target new high (will trail stop), unrealized points = + 0.44, unrealized P/L = + $110

PBW long (600 shares from July 18 entry) – bought 22.16, stop 21.13, target new high (will trail stop), unrealized points = + 0.14, unrealized P/L = + $84

RKH short (100 shares from July 18 entry) – sold short 156.87, stop 160.80, target 148.30, unrealized points = + 0.72, unrealized P/L = + $72

IBB long (250 shares from July 13 entry) – bought 80.33, stop 78.69, target 83.35, unrealized points = (0.83), unrealized P/L = ($208)

Closed positions (since last report):

(none)

Current equity exposure ($100,000 max. buying power):

$98,373

Notes:

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Edited by Deron Wagner,
MTG Founder and
Head Trader

Deron Wagner

Deron Wagner is a professional trader, author of several ETF trading books, and the Founder of Morpheus Trading Group. Since 2002, he has been sharing his proven swing trading strategy with thousands of traders around the world. He has appeared on CNBC, ABC, and Yahoo! Finance Vision television networks, and is a frequent guest speaker at various global investing conferences.