Commentary:
Stocks gapped higher on yesterday’s open, but subsequently managed only to move in a choppy, sideways range before finishing with mixed results. The blue-chip Dow Jones Industrial Average showed leadership by gaining 0.7% and closing in the upper quarter of its intraday range. The S&P 500 and Nasdaq Composite were higher by 0.5% and 0.1% respectively. The small-cap Russell 2000 slipped 0.1% and the S&P Midcap 400 lost 0.2%. The S&P 500 settled in the middle of the day’s range, while the Nasdaq closed near its low.
Total volume in the NYSE receded 23%, as volume in the Nasdaq dropped 11% below the previous day’s level. There have been two “up” days and two “down” days within the past four sessions. However, both of the “up” days have occurred on declining volume, while both “down” days were “distribution days” indicative of institutional selling. The broad market has basically gone nowhere over the past four days, but a look “under the hood” at the volume patterns discreetly reveals underlying weakness. Because prices continue to hold up pretty well, negative price to volume relationships in the market are not solely enough justification to be bearish on the stock market. Nevertheless, professional traders who monitor underlying internals and volume patterns may begin hovering their fingers over the sell buttons in case prices begin to confirm the early warning signs.
Since we closed out the iPath India Fund (INP) for a nice profit two days ago, we now have five open ETF positions remaining, four of which continue to show unrealized gains since our entries. On a point basis, the short position in the Regional Bank HOLDR (RKH) is showing the greatest gain. Since selling short RKH just four days ago, at a price of 156.87, the trade is currently showing a gain of 5.57 points. Yesterday, one of our subscribers asked if we could explain the technical rationale for entering the trade where we did. Rather than privately replying to the e-mail, we figured it would be a good educational example to discuss in today’s commentary.
For a long trade setup, one of the biggest things we look for is convergence of several support levels on multiple time frames. For a short trade setup, we like to see the opposite, which is a convergence of resistance levels on multiple time frames. In the case of RKH, a perfect short entry was provided last week when it rallied into major resistance on both its daily and weekly charts. Since longer chart intervals carry more weight than shorter intervals, the first thing we liked was big resistance on the weekly chart of RKH. Specifically, it had rallied into new resistance of its prior uptrend line that it broke below in late June. Notice how RKH was unable to climb back above its prior uptrend line after it fell below it:
With the break of a four-year uptrend providing the main impetus for the short idea, we drilled down to the shorter-term daily chart. Upon doing so, we were pleased to see that RKH had also rallied perfectly into several resistance levels on that time frame as well. Take a look:
First, notice the intermediate-term downtrend line that is illustrated by the descending red line. On both July 16 and 17, RKH formed bearish “inverted hammer” candlesticks after trying, but failing, to break out above the intermediate-term downtrend line. This alone provided a decent short entry, but it was made even better by the fact that resistance of both the 50 and 200-day MAs converged with the downtrend line as well. Going into July 18, our plan was to sell short RKH on a break of its July 17 low. As you can see, our short entry happened on that day’s open. Considering resistance of its prior uptrend line on the weekly chart, combined with overhead resistance of the daily downtrend line, 50-day MA, and 200-day MA, it’s not surprising that RKH has rapidly fallen apart over the past few days. Our downside price target in RKH is just a few points below its current level, but we’ll be trailing a stop along the way in order to protect the gain while maximizing profits.
As for the broad market, the major indices have entered into a choppy, indecisive range over the past week. Below current prices, clear support for the major indices is at the intraday lows of July 20. This was illustrated in yesterday’s Wagner Daily. A convincing break below those levels could send the bulls running, as the S&P would probably break below its 50-day MA shortly thereafter. Conversely, a breakout above the highs of the recent ranges would instantly send the major indices back into new multi-year or record highs that are completely devoid of technical resistance. Stay alert and prepared for either scenario at this critical juncture.
Today’s Watchlist:
There are no new setups in the pre-market today. 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 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:
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Open positions (coming into today):
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GDX long (300 shares total – 200 shares from July 10, added 100 on July 17) –
bought 40.76 (avg.), stop 41.18, target new high (will trail stop), unrealized points = + 2.23, unrealized P/L = + $669
RKH short (100 shares from July 18 entry) – sold short 156.87, stop 158.80, target 148.30, unrealized points = + 5.57, unrealized P/L = + $557
PBW long (600 shares from July 18 entry) – bought 22.16, stop 21.13, target new high (will trail stop), unrealized points = + 0.11, unrealized P/L = + $66
FXC long (250 shares from July 6 entry) – bought 95.51, stop 93.54, target new high (will trail stop), unrealized points = + 0.23, unrealized P/L = + $58
IBB long (250 shares from July 13 entry) – bought 80.33, stop 78.69, target 83.35, unrealized points = (1.10), unrealized P/L = ($275)
Closed positions (since last report):
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(none)
Current equity exposure ($100,000 max. buying power):
- $85,132
Notes:
No changes to the open positions above.
Edited by Deron Wagner,
MTG Founder and
Head Trader