Commentary:
The major indices gapped higher on last Friday’s open, chopped around throughout the day, then settled near their positive opening prices. Stocks showed little reaction to the morning Fed commentary on the economy, most likely due to the large opening gap that preceded it. The Nasdaq Composite gained 1.2%, the S&P 500 1.1%, and the Dow Jones Industrial Average 0.9%. The small-cap Russell 2000 and S&P Midcap 400 indices advanced 1.2% and 1.5% respectively. Each of the main indexes barely closed in the upper third of their intraday ranges, as a quick drop in the final fifteen minutes of trading caused stocks to finish off their highs. Despite a lot of indecision, most of the major indices were little changed for the week.
Turnover was mixed ahead of the holiday weekend. Total volume in the NYSE rose 8%, enabling the S&P to score a bullish “accumulation day,” but volume in the Nasdaq declined 8% below the previous day’s level. Considering that trading usually tapers off ahead of a three-day weekend, it was positive that volume in the NYSE still ticked higher. Still, it was the tenth straight day of below-average volume in both exchanges. Now that the Labor Day holiday has passed, we expect to see the return of institutional trading activity over the next several days. The market’s direction that coincides with this increased turnover will likely set the overall tone for the rest of the month.
The S&P 500 closed the week above resistance of its intermediate-term downtrend line, but backed off after testing resistance of its prior high from August 24. While a “higher low” has been formed, a subsequent “higher high” has not yet been established. As such, the index remains in its intermediate-term downtrend:
A firm close above last Friday’s high would cause a “higher high” to be formed, but overhead resistance of the 50-day MA may prove troublesome. Based on last week’s break of the primary downtrend line, we do not advocate being heavily short right now. However, be aware that new long entries in the broad-based ETFs also do not carry a very attractive risk/reward ratio at current levels. It would only require a break of last Friday’s lows in the S&P or other main indexes to resume the primary intermediate-term downtrends. Such a move would also put the S&P 500 back below its pivotal 200-day MA. The daily chart pattern in the Dow is similar to the S&P 500, except that it’s a bit higher above its 200-day MA.
Due to its recent relative strength, the Nasdaq Composite is looking much better than both the S&P and Dow. It is the only index that closed the week above its 50-day MA, albeit only marginally:
Friday’s strength caused several ETFs we were stalking for potential entry to trigger on the long side. The Oil Service HOLDR (OIH) triggered when it gapped up above the August 29 high, then rose to a new intraday high after the first 20 minutes of trading. We bought the iShares Nasdaq Biotech (IBB) when it moved above both its weekly downtrend line and 200-day MA. Both OIH and IBB were looking pretty good throughout most of the day, but the broad-based selling in the final minutes of trading caused both to close near the middle of their intraday ranges. We’ll be monitoring both positions closely today, as we don’t want to fall victim to failed breakouts if either ETF does not hold above Friday’s low. Tight stops on long positions right now is a good idea.
In addition to OIH and IBB, our long entry in the iShares Corporate Bond Fund (LQD) also triggered. We like that LQD not only closed near its intraday high, but also has a low correlation to the overall direction of the main stock market indexes. The same could be said of our long position in the iShares 20+ year Treasury Bond Fund (TLT).
Our bearish position in the Dow Jones Industrials (DXD long) stopped out last Friday when the Dow gapped up and subsequently rose above its 20-minute opening high. However, the closing broad market weakness caused DXD to finish back above our sell price. With resistance of the 50-day MA just overhead in the Dow, the index could easily resume its intermediate-term downtrend from here. This is especially true considering that many shorts have been shaken out now. We’re prepared to re-enter bearish positions in the Dow or S&P 500, but only if they fall below Friday’s lows and their hourly uptrend lines from the August 16 lows. Avoid shorting the Nasdaq due to its relative strength. If the S&P and Dow close above their August 24 highs and 50-day MAs, all bets are off on the short side of the market.
Today’s Watchlist:
There are no new setups today, as we are near the maximum buying power of the model account. However, if the market suddenly reverses lower, we’ll be looking to close any weak long positions and re-establish new short entries. Current market conditions mandate a high level of alertness and readiness to rapidly reverse course.
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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TLT long (300 shares from August 24 entry) – bought 88.02, stop 86.61, target 90.89, unrealized points + 0.86, unrealized P/L + $258
LQD long (350 shares from August 31 entry) – bought 104.99 (avg.), stop 103.53, target 107.48, unrealized points + 0.22, unrealized P/L + $77
IBB long (200 shares from August 31 entry) – bought 79.36, stop 77.28, target 83.30, unrealized points (0.31), unrealized P/L ($62)
OIH long (100 shares from August 31 entry) – bought 178.94, stop 173.28, target 189.90, unrealized points (0.23), unrealized P/L ($23)
Closed positions (since last report):
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DXD long (250 shares total – half from Aug. 22, half from Aug. 23) – bought 52.07 (avg.), sold 50.40, points (1.67), net P/L ($423)
Current equity exposure ($100,000 max. buying power):
- $97,168
Notes:
LQD long triggered. Per intraday e-mail alert we added later in the day. New average price shown above, as well as new stop. Note that LQD will gap down today due to dividend distribution.
OIH gapped above our original trigger, but subsequently went above its 20-minute opening high, triggering us long. Stop has been tightened.
IBB long triggered.
DXD hit our trailing stop when it dropped below its 20-minute opening low.
Still long TLT, which continues to move steadily moving higher.
Edited by Deron Wagner,
MTG Founder and
Head Trader