The stock market followed through with another round of broad-based gains yesterday, but getting there was quite a wild ride. After opening slightly lower, the major indices recovered and moved marginally higher into the 2:15 pm Fed announcement on economic policy. Immediately following the FOMC commentary, stocks nosedived to new intraday lows, but they whipped back up to new intraday highs less than an hour later. Trading is typically volatile and whippy immediately following Fed announcements. Yesterday’s action was certainly no disappointment in that arena! By day’s end, both the S&P 500 and Nasdaq Composite had settled 0.6% higher. The Dow Jones Industrial Average gained only 0.3%, but small and mid-cap stocks perked up for a change. The Russell 2000 and S&P Midcap 400 indices rallied 1.0% and 0.8% respectively. A pullback in the final fifteen minutes of trading caused stocks to finish off their best levels, but the gains were still impressive considering how far the market recovered from its afternoon plunge.
Total volume in the NYSE declined by 2%, while the Nasdaq volume was on par with the previous day’s level. Still, turnover in the Nasdaq has exceeded 50-day average levels for sixteen consecutive days. Market internals were only slightly positive. In the Nasdaq, advancing volume edged out declining volume by a margin of 1.3 to 1. The NYSE ratio was positive by just under 2 to 1.
We have mentioned several times over the past two weeks that the PowerShares Clean Energy (PBW) is an ETF with relative strength that should resume leadership as soon as the market stabilizes. As such, we took an updated look at PBW when the broad market formed its bullish reversal day on August 6, and were pleased with what we saw. After closing below its 50-day moving average for just one day, PBW formed a “hammer” candlestick, one with a rather long wick. This bullish pattern is circled on the daily chart below:
When a “hammer” forms just below a key support level like the 50-day MA, it has the effect of shaking out the “weak hands” so that the stock or ETF can resume its primary uptrend with less overhead supply. After the formation of a “hammer,” the following day usually provides a low-risk buy entry point, especially if the upside reversal coincides with a major area of support. Looking at the long-term weekly chart, notice how PBW reversed after dipping below support of its primary uptrend line:
The formation of a long-wicked “hammer,” combined with key support of its weekly uptrend line, prompted us to look for an entry point in PBW yesterday morning. We didn’t have to wait long, as the small opening gap down provided us with the perfect opportunity to buy. Per intraday e-mail alert to subscribers, we bought PBW ten minutes after the open, at a price of $20.69. The 4.9% gain that PBW subsequently went on to achieve yesterday was the third largest percentage gain of the 551 ETFs we monitor on a daily basis. But unlike the Fidelity Nasdaq Composite (ONEQ), which we intend to sell into strength for a quick gain within the next day or two, we plan to hold PBW as an intermediate-term trade. Given its relative strength and clearly-defined uptrend line, it should be one of the first sector ETFs to rally to a new high as the broad market recovers. Barring any of the major indices suddenly falling to new August lows, our projected holding period for PBW is at least several weeks.
Now that the stock market is at least in bounce mode, let’s take an updated look at the short-term resistance levels in the S&P and Nasdaq. In the August 3 issue of The Wagner Daily, we illustrated how the first major level of resistance for the S&P 500 would be found at the 1,490 area, which marked resistance of the prior lows from June. On the daily chart below, notice how the S&P backed off after approaching that level yesterday:
Over the past few days, the 20-day EMA of the S&P has descended, causing it to converge with resistance of the June lows. This confluence, of course, may make it more difficult for the index to move above yesterday’s high, at least in the short-term. If the S&P 500 happens to convincingly close above the 1,491 level, expect the 50-day moving average, currently at 1,512, to provide an even more significant level of resistance. Next, check out the Nasdaq Composite:
The Nasdaq Composite may recover faster than the S&P 500 because less technical damage has been done to its chart. Unlike the S&P, the Nasdaq only closed below its June lows for one day, not enough to announce a clear break of support. The Nasdaq also held above its 200-day moving average, the test of which was largely responsible for triggering the broad-based bounce two days ago. Significant overhead resistance will be found in the range of 2,600 to 2,615, comprising the 20-day EMA and 50-day MA respectively. It is on a rally into this area that we plan to take profits on ONEQ. If, however, the Nasdaq suddenly heads south today, a tight trailing stop should still enable us to lock in a decent gain. We’re avoiding new entries on the short side of the market right now, but this could quickly change if the major indices are unable to at least hold onto their gains of the past two days.
There are no new setups in the pre-market today, although we entered a new position in PBW via intraday e-mail alert yesterday. As always, we will send an e-mail alert if/when we come across any new trade entries.
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):
ONEQ long (300 shares from August 6 entry) – bought 98.88, stop 97.62, target (see notes below), unrealized points = + 1.88, unrealized P/L = + $564
PBW long (500 shares from August 7 entry) – bought 20.69, stop 20.39, target new high (will trail stop), unrealized points = + 1.11, unrealized P/L = + $555
EEM short (100 shares from August 1 entry) – sold short 131.17, stop 136.44, target 120.18, unrealized points = + 0.17, unrealized P/L = + $17
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
Per intraday e-mail alert, we bought PBW shortly after the open yesterday. We have already tightened the stop in order to reduce the risk. For now, we are keeping the original stop on ONEQ. However, we will be watching the Nasdaq closely today for any signs of weakness that would suggest it’s time to take profits. Ideally, one more upward surge would also provide an ideal exit point. Be on the lookout for an intraday sell alert on this position over the next day or two.
Edited by Deron Wagner,
MTG Founder and