Commentary:

Stocks gapped open higher for the second straight day, but this time the gains remained intact. The major indices built on their opening advance, grinding higher throughout the day, before finishing near their intraday highs. Both the S&P 500 and Dow Jones Industrial Average gained 1.4%, while the Nasdaq Composite climbed 1.5%. The small-cap Russell 2000 and S&P Midcap 400 indices were higher by 1.6% and 1.2% respectively. Despite erratic volatility in the final thirty minutes of trading, the broad market closed strong for the first time in weeks.

Unfortunately for the bulls, yesterday’s rally lacked the confirmation of higher turnover. The main ingredient of bullish trend reversal attempts, overall volume levels fell in both exchanges. Total volume in the NYSE registered 3% below the previous day’s level, as volume in the Nasdaq ticked 1% lower. Although volume eased only slightly, it was a sign that institutions are still quite complacent. Most likely, mutual funds, hedge funds, and other institutional investors are in no hurry to jump back in the markets until they see the Fed’s next move on September 18. Despite lower turnover, market internals were solid. In both the NYSE and Nasdaq, advancing volume exceeded declining volume by a ratio of approximately 5 to 1.

Zooming 2.3% higher yesterday, the Biotech Index ($BTK) was one of the day’s top performing industry sectors. After a brief pullback to support on Monday, the iShares Nasdaq Biotech (IBB) similarly gained 2.1% yesterday. The successful test of support is annotated by the pink ellipse on the daily chart of IBB below:

If IBB moves just a bit higher and clears the $82 area, it will have popped above horizontal price resistance from May of this year. That should enable IBB to subsequently test resistance of its 52-week high shortly thereafter. Overall, IBB is acting well since breaking out above its downtrend line early last week. Our IBB position is presently showing an unrealized gain of more than 2 points since our August 31 long entry, but our price target remains about 1.5 points higher. We plan to sell IBB into strength as it tests resistance of its 52-week high.

Since breaking out above its 50-day MA on August 31, the Oil Service HOLDR (OIH) is another ETF that has been acting well. On September 10, OIH pulled back to test support of its breakout, then formed a bullish “hammer” candlestick pattern into the close. It followed through with a gain yesterday, and is now poised to break out above its short-term consolidation. Take a look:

Now that the breakout above the 50-day MA appears to be holding, we may buy OIH on a rally above its September 6 high of $185.60. Such a move should enable OIH to carry on to a new record high. Because the current chart pattern resembles a “cup and handle” pattern, a rally above the high of the consolidation is more important than waiting for a breakout above the July high.

In yesterday’s commentary, we illustrated resistance of the hourly downtrend lines for the S&P, Dow, and Nasdaq. As one might have guessed, yesterday’s substantial gains enabled all three indexes to close above those trendlines. As you can see, the S&P 500 also moved back above its 200-day MA:

The breakout above the hourly downtrend lines in all three main indexes is bullish in the short-term, but the intermediate-term picture remains pretty fuzzy. The S&P 500, for example is now trapped between a rock and a hard place. Notice how the 200-day MA continues to flex its muscles by providing support, but the closely watched 50-day MA looms just overhead. The first test of the 50-day MA on September 4 was instantly met by selling that led to the current short-term downtrend. Further, the 50-day MA now converges with upper channel resistance of the intermediate-term downtrend (the red descending line). Clearly, it will take some work for the S&P 500 to absorb that overhead supply. The power of institutional buying could certainly do it, but it should prove difficult to move much higher if overall volume remains stagnant. For that reason, continue to pay close attention to not only the market’s price action, but the changes in turnover as well.

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Today’s Watchlist:

There are no new setups in the pre-market. However, we are stalking OIH for a potential long entry on a breakout above its September 6 high. We will send an intraday e-mail alert if/when we enter. GLD continues to act great, but has not yet consolidated enough to give us a low-risk entry point.

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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 (250 shares total – bought 200 shares on Aug. 31, added 50 on Sept. 7) –

bought 79.62 (avg.), stop 78.89, target 83.30, unrealized points + 2.08, unrealized P/L + $520

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 + 0.43, unrealized P/L + $151

DXD long (300 shares from September 5 entry) – bought 51.42, stop 49.38, target 56.90, unrealized points (0.46), unrealized P/L ($138)

SDS long (250 shares from September 7 entry) – bought 56.12, stop 53.74, target 62.89, unrealized points (1.27), unrealized P/L ($318)

Closed positions (since last report):

(none)

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

$86,151

Notes:


No changes to the open positions above.

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