Commentary:
Yesterday was another tug-of-war between the bulls and bears, as stocks gapped higher and rallied throughout the morning, but drifted lower in the afternoon. All the major indices finished higher, but well off their best levels of the session. The S&P 500 gained 0.8% and the Dow Jones Industrial Average rallied 1.0%. Breaking its pattern of relative strength from recent weeks, the Nasdaq Composite lagged for the second straight day, rising only 0.4%. The performance in small and mid-caps was also unimpressive. Both the Russell 2000 and S&P Midcap advanced just 0.3%. With the exception of the Dow, all the main stock market indexes closed near the middle of their intraday ranges. The blue-chip Dow Industrials settled in the upper quarter of the day’s range.
Once again, lighter turnover in both exchanges failed to validate yesterday’s gains. Total volume in the NYSE fell 1%, while volume in the Nasdaq came in 12% below the previous day’s level. Without the support of institutional buying, rallies are easily overcome by overhead supply from prior highs. Yesterday afternoon’s weakness is a good example of what often happens when a market tries to reverse off a downtrend, but on light volume. In the NYSE, advancing volume exceeded declining volume by approximately 5 to 2. The Nasdaq ratio was positive by only 1.3 to 1.
For the past several days, we have been stalking the Oil Service HOLDR (OIH) for a potential long entry above the highs of its near-term consolidation. Yesterday, it tested the high of its recent range, but couldn’t quite move above it. Nevertheless, we like how the bullish consolidation has tightened up considerably. The daily chart of OIH below illustrates this:
OIH probed two cents above its September 6 high of $185.60, but missed our trigger price of $185.78. When buying a breakout of consolidation, it’s important to give your entry price enough “wiggle room” above the pivot to prevent a premature entry on a “stop hunt” above resistance. At a minimum, we make sure stocks and ETFs move at least 10 cents beyond the actual support/resistance level. With more volatile issues, we often use 20 to 30 cents. Going into today, we’re still targeting a potential long entry in OIH.
The “head and shoulders” patterns we pointed out on the hourly charts of the S&P and Dow yesterday have not yet followed through. However, the patterns have not yet failed either. In both indexes, the “right shoulders” are now higher than the “left shoulders,” but prices remained below the top of the “head.” The S&P 500 closed above its 50-day MA, but only by one point. The index did the same on September 4, then reversed sharply lower in the following four days. Resistance of the intermediate-term downtrend line also remains intact, though the S&P probed above it on an intraday basis:
Curiously, the Dow also managed to closed just a couple points above its 50-day MA. Like the S&P, it did the same thing on September 4, then sold off immediately thereafter:
As you can see, the S&P and Dow are now at pivotal “make it or break it” levels. If they blast through yesterday’s highs, and above their September 4 highs, their intermediate-term downtrends will have been broken. Conversely, a downward reversal and breakdown below the September 10 lows will indicate a resumption of the downtrends that have been in place for several months. Unfortunately, the markets may lack conviction in either direction until solid volume returns to the markets. This probably won’t happen until after the Fed’s meeting on economic policy next Tuesday.
Today’s Watchlist:
OIH – Oil Service HOLDR
Long
Shares = 100
Trigger = 185.78 (over the high of the consolidation)
Stop = 180.83
Target = new high (will trail stop)
Dividend Date = n/a (individual stocks pay dividends)
Notes = This setup from yesterday’s intraday e-mail alert did not yet trigger. See commentary above for explanation of the setup.
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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IBB long (125 shares remaining from Aug. 31 and Sept. 7 entries) –
bought 79.62 (avg.), stop 78.89, target 83.30, unrealized points + 1.86, unrealized P/L + $233
SDS long (250 shares from September 13 re-entry) – bought 53.90, stop 53.18, target 62.89, unrealized points + 0.14, unrealized P/L + $35
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 (0.15), unrealized P/L ($53)
DXD long (300 shares from September 5 entry) – bought 51.42, stop 49.38, target 56.90, unrealized points (1.15), unrealized P/L ($345)
Closed positions (since last report):
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IBB long (sold 125 shares from Aug. 31/Sept. 7, 125 shares remaining open) –
bought 79.62 (avg.), sold 81.79, points + 2.17, net P/L + $269
SDS long (250 shares from September 7 entry) – bought 56.12, sold 53.73, points (2.39), net P/L ($603)
Current equity exposure ($100,000 max. buying power):
- $75,298
Notes:
Per intraday e-mail alert and due to the weak afternoon session, we re-entered SDS after getting stopped out. Stop on the re-entry, just below yesterday’s low, carries minimal risk on the trade. We also made a judgment call to sell and take profit on half of IBB yesterday afternoon. The OIH setup did not yet trigger.
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.
Edited by Deron Wagner,
MTG Founder and
Head Trader