Traders returned from the holiday in an optimistic mood, propelling stocks higher on increasing volume. After opening flat, the broad market trended steadily upwards throughout most of the day. The Nasdaq Composite continued to lead the stock market, accelerating 1.3% higher. The S&P 500 rallied 1.1%, while the Dow Jones Industrial Average lagged slightly with a 0.7% gain. The small-cap Russell 2000 gained 1.0% and the S&P Midcap 400 advanced 1.2%. Like the previous session, selling in the final thirty minutes of trading caused each of the major indices to give back about one-third of their intraday gains.
Total volume in the Nasdaq surged 20% higher yesterday, enabling the index to register a bullish “accumulation day.” In the NYSE, however, volume ticked 2% lower. It’s positive that the Nasdaq’s gains were confirmed by stronger volume, but turnover in both exchanges still remained below average levels. This tells us that institutional investors and professional traders apparently are not that anxious to jump back in the markets. Nevertheless, market internals were solid. Advancing volume in the NYSE exceeded declining volume by a margin of 4 to 1. The Nasdaq ratio was positive by nearly 6 to 1.
One industry sector that is starting to see institutional buying interest is the Biotech Index ($BTK). Yesterday, the index outperformed the major indices by gaining 1.9%, broke out above a multi-month downtrend, and closed back above its 200-day MA. This is illustrated on the daily chart of the $BTK below:
The red dashed horizontal line at the 795 level marks price resistance from the prior highs of July. The index tested that level yesterday, but backed off into the close. If the $BTK manages to break out above that price, it should see a decent amount of upward momentum in the short to intermediate-term. The 200-day MA, right at yesterday’s low, should serve as solid support. A break back below that level would be bearish and indicate a failed trend reversal in the sector. ETF tickers correlated to the Biotech sector are: IBB, BBH, FBT, PBE, and XBI. We remain long IBB from our August 31 entry, though we have trailed the stop higher, to near break-even, in order to protect against a failed trend reversal. As you can see, the IBB chart looks similar to the $BTK Index:
The Oil Service HOLDR (OIH), which we also bought on August 31, gained more than 4 points (2.4%) yesterday. It has now rallied beyond resistance of the 61.8% Fibonacci retracement from its July high to August low. This increases the odds of OIH moving back up to its all-time high that was set on July 23. However, there is a bit of horizontal price resistance from July as well:
OIH closed just above the pivotal area of resistance shown above, but we have trailed our stop much tighter in order to protect the profit if it falls below yesterday’s close. Specifically, we don’t like that OIH has climbed on lighter than average volume. A pullback from here would probably send OIH back down to support of its 50-day MA, but we’re not willing to hold through such a retracement at this time. Why not? Because both the S&P 500 and Dow Industrials closed right at critical tests of their 50-day MA resistance. If they fail to move back above their 50-day MAs within the next day or two, it could lead to a substantial short-term pullback in the broad market. Consider having tight stops on all long positions outside of the Nasdaq.
There are no new setups today, as we are near the maximum buying power of the model account. We’re presently 100% long, but we’ll be looking to close any weak positions and re-establish new short entries if the market suddenly reverses sharply lower. 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:
Open positions (coming into today):
OIH long (100 shares from August 31 entry) – bought 178.94, stop 182.84, target 189.90, unrealized points + 4.3, unrealized P/L + $430
TLT long (300 shares from August 24 entry) – (see notes below regarding dividend distributions)
bought 88.02, stop 86.61, target 90.89, unrealized points + 0.88, unrealized P/L + $264
IBB long (200 shares from August 31 entry) – bought 79.36, stop 78.89, target 83.30, unrealized points + 1.12, unrealized P/L + $224
LQD long (350 shares from August 31 entry) – (see notes below regarding dividend distributions)
bought 104.99 (avg.), stop 103.53, target 107.48, unrealized points (0.01), unrealized P/L ($4)
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
Note the new stops on OIH and IBB. The OIH stop is very tight, just below yesterday’s close. Note that if OIH gaps open below its stop, we will NOT be using the MTG Opening Gap Rules. Instead, we will sell at market, on the open. We don’t like the light volume rally off the 50-day MA, so better to lock in a gain if it starts to head lower.
On September 4, both TLT and LQD traded ex-dividend. The TLT dividend distribution was 34 cents per share. LQD was 49 cents per share. Unrealized points and P/L figures include this distribution, which will be paid out on September 10.
Edited by Deron Wagner,
MTG Founder and