Commentary:
An indecisive session concluded with a round of broad-based gains yesterday, as the S&P and Dow continued to consolidate their gains from last week’s breakout, rising 0.5% and 0.7% respectively. The Nasdaq Composite maintained the week’s relative strength by breaking out above its near-term trading range and gaining 0.6%. Both the small-cap Russell 2000 and S&P Midcap 400 indices rallied 0.8%. Though the closing gains were solid, the intraday trading action was far from it. The S&P 500 gapped higher on the open, moved above the opening high just before mid-day, then promptly dropped to a new intraday low and a nearly unchanged price level in the early afternoon. The bulls fought back in the final hour, pushing the S&P 500 all the way to a new intraday high, but the bears stepped in again during the final thirty minutes. It was a dizzying session overall. Yesterday’s tug-of-war between the bulls and bears is shown on the 5-minute chart of the S&P 500 SPDR (SPY) below:
Total volume in the Nasdaq increased 7% over the previous day’s level, indicating the presence of institutional buying. It was the third such “accumulation day” in the Nasdaq since last week’s breakout. Turnover in the NYSE was milder, coming in 3% lighter. The S&P has had two recent days of accumulation, but has begun showing slight relative weakness to the Nasdaq. Advancing volume in the Nasdaq exceeded declining volume by 3 to 2, while the NYSE ratio was positive by 2 to 1 yesterday.
Yesterday, we sold the remaining half position of the iShares Nasdaq Biotech Fund (IBB) as it tested resistance of its prior high. That was in line with our original plan, as we expected a rally up to the prior high, followed by a period of price consolidation. We sold into strength after IBB came within five cents of our price target, just above the April 26 high. This is illustrated on the weekly chart of IBB below:
The small-cap Russell 2000 is likely to make a big move in the coming week, but the question is which direction it will go. Throughout August and early September, the 200-day moving average acted like a brick wall, perfectly stopping all rally attempts dead in their tracks. Not surprisingly, last week’s Fed announcement triggered enough momentum for the index to break out above its 200-day MA, but not convincingly so. Two days ago, the Russell fell back below its 200-day MA, then grinded its way back above it yesterday. The magnetic properties of the 200-day MA are shown below on the daily chart of the iShares Russell 2000 Index (IWM):
If it can hold above its 200-day MA for the next several days, IWM could see a substantial burst of upward momentum in the intermediate-term. However, compared to the other main indexes, the Russell has been lagging quite a bit. Compared to the S&P, Nasdaq, and Dow notice how far the Russell 2000 remains below its 52-week high. It’s merely moved sideways while the rest of the broad market moved higher. Because of this relative weakness, we think there’s a good chance the next major move in the index will be lower. Whichever way it goes, the volatility of the move should be rather high. The longer an index remains glued to a pivotal area of support/resistance, the more powerful the eventual breakout or breakdown will be.
The S&P 500 and Dow Industrials bounced off support of their hourly uptrend lines for the second straight day, though both indexes were in danger of breaking down before the buyers saved the day in the final hour. If either of the indexes fall below yesterday’s lows, they will have also broken support of their hourly uptrend lines. We intend to “dip a toe in the water” by initiating a near-term short sale if that occurs. Note that we are not really bearish on the market right now, but we think the risk/reward of a downward momentum trade is pretty good near current levels. Trying to guess where the market will form a short-term top is dangerous, but waiting for some type of confirmation of a trend reversal is not. A breakdown below yesterday’s lows in any of the major indexes would provide us with exactly that. Regular subscribers should note our trigger, stop, and target prices on the trade setup listed below.
Today’s Watchlist:
SDS – UltraShort S&P 500 ProShares
Long
Shares = 350
Trigger = 51.24 (above yesterday’s high)
Stop = 49.67 (below the recent lows)
Target = 55.28 (resistance of 200-day MA)
Dividend Date = December 2007
Notes = This setup that was e-mailed to subscribers yesterday did not trigger, but remains on our watchlist for today. Note the slight changes to the share size and stop price.
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):
-
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 + 0.79, unrealized P/L + $277
Closed positions (since last report):
-
IBB long (125 shares remaining from Aug. 31 and Sept. 7 entries) –
bought 79.62 (avg.), sold 83.70, points + 4.08, net P/L + $508
Current equity exposure ($100,000 max. buying power):
- $36,851
Notes:
Per intraday e-mail alert, we sold the remaining shares of our IBB position near yesterday’s high. The first half of the position was also sold for a solid gain two weeks ago. The SDS long setup did not yet trigger, but remains on our watchlist going into today (as per 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.
Edited by Deron Wagner,
MTG Founder and
Head Trader