Commentary:

Stocks followed up Wednesday’s “distribution day” by chopping around in a relatively tight range, then finishing modestly higher. Both the S&P 500 and Dow Jones Industrial Average gained 0.4%, while both the Nasdaq Composite and small-cap Russell 2000 bounced 0.3%. The S&P Midcap 400 Index advanced 0.5%. Like the other two “up” days this week, all of the major indices lacked the power to finish at their intraday highs. Instead, each broad-based index settled in the upper third of its range.

When the stock market attempts to bounce after a day of higher volume selling, it usually does so on lighter volume. Such was the case yesterday. Total volume in the NYSE declined 8%, as volume in the Nasdaq trickled in 6% below the previous day’s level. Ideally, the bulls would have preferred to see institutions step in and buy the prior day’s pullback, but the low turnover tells us they did not. In both exchanges, market internals were slightly positive. The advancing volume exceeded declining volume by less than 2 to 1.

While most of the broad market was relatively stagnant, the CBOE Gold Index ($XAU) rocketed nearly 7% higher yesterday. We haven’t discussed the gold ETFs lately because both the stocks and the spot gold commodity have been merely oscillating in a range. But yesterday’s action changed all that, putting several of the ETFs into play. First, the well-known StreetTRACKS Gold Trust (GLD), which mirrors the price of spot gold, rallied 1.9% yesterday. Though the individual gold mining stocks gained more than the actual commodity, GLD is now poised to break out of a 6-month base of consolidation. The test of the prior high is illustrated on the weekly chart below:

GLD closed just a few cents above its April 2007 high (circled in pink above). Any further gain today, especially if on strong volume, should help to confirm the breakout above horizontal price resistance. We’ll be monitoring GLD for a potential long entry on the first minor pullback after the breakout.

Correlated to a basket of individual gold mining stocks, the Market Vectors Gold Miners (GDX) motored 6.4% higher. It more closely matched the gain of the $GOX index yesterday, but the weekly chart pattern is not nearly as nice as GLD. Though it did break out above its 200-day MA, GDX is still in the middle of a range that has persisted for more than a year. Unless only playing short-term momentum, we would trade in GLD over GDX. The weekly chart of GDX below illustrates the choppy mess:

Yesterday’s lackluster action failed to change the technical picture of the main stock market indexes. The Nasdaq Composite continues to hold right at support of its 50-day MA. The weaker S&P 500 and Dow Industrials are both stuck below resistance of their 50-day MAs, but holding above their 20-day EMAs. As discussed in yesterday’s commentary, divergence between the Nasdaq and the S&P/Dow remains quite prevalent. Until the major indices get in sync in one direction or the other, positioning yourself on both sides of the market is the safest bet. Yesterday, we sold the iShares 20+ year Treasury Bond (TLT) in order to secure a solid gain, but we remain long the iShares Nasdaq Biotech (IBB) and iShares Corporate Bond Fund (LQD). Our sole bearish position is long the inversely correlated UltraShort Dow 30 ProShares (DXD).

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Today’s Watchlist:

There are no new setups in the pre-market. However, we will be monitoring the price action in GLD for a potential long entry and will promptly send an intraday e-mail alert if/when we buy it today.

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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):
IBB long (200 shares from August 31 entry) – bought 79.36, stop 78.89, target 83.30, unrealized points + 1.99, unrealized P/L + $398

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 + 0.16, unrealized P/L + $56

DXD long (300 shares from September 5 entry) – bought 51.42, stop 49.38, target 56.90, unrealized points (0.68), unrealized P/L ($207)

Closed positions (since last report):

TLT long (300 shares from August 24 entry) – bought 88.02, sold 89.31, points + 1.63, net P/L + $483

(includes 34 cent/share dividend distribution)

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

$68,120

Notes:


Per intraday e-mail alert, we raised the stop on TLT. It was subsequently triggered later in the session. No changes to the other open positions.

On September 4, LQD traded ex-dividend, with a dividend distribution of 49 cents per share. Unrealized points and P/L figures include this distribution, which will be paid out on September 10.

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Edited by Deron Wagner,
MTG Founder and
Head Trader