The major indices closed lower for the second straight session yesterday, but the intraday action was not as negative. The broad market gapped down on the open, initially moved a bit lower, then stabilized and drifted sideways throughout the rest of the day. This compares more favorably to Monday’s losses, which resulted from steady intraday downtrends in all of the main stock market indexes. The S&P 500 fell 0.7%, the Nasdaq Composite 0.6%, and the Dow Jones Industrial Average 0.5%. The small-cap Russell 2000 slid 0.7% and the S&P Midcap 400 lost 0.9%. Like the previous day, stocks finished off their intraday lows, but still near the bottom of their trading ranges.
The marginally bright spot of yesterday’s session is that turnover receded slightly. Total volume in both the NYSE and Nasdaq declined 1% below the previous day’s levels. Although trading activity didn’t back off much from the previous day’s distribution levels, it’s positive that volume did not tick higher. The presence of higher volume would have added another “distribution day” to the running count of institutional selling. Failing to improve, declining volume in the NYSE again exceeded advancing volume by more than 3 to 1. The Nasdaq adv/dec volume ratio improved slightly, registering negative by just over 2 to 1.
When the stock market gapped down yesterday morning, we sent intraday e-mail alerts to subscribers, informing them of two different actions we were taking. First, we covered our short position in the Internet HOLDR (HHH), locking in a gain of just over one point. On a technical level, we liked its breakdown below both trendline support and its 20-day EMA, but we did not want to hold the short position through Yahoo!’s earnings report after the close. As such, we made a decision to cover the short sale into weakness, rather than take the risk of holding through a major earnings report. The corrective action in HHH is annotated on the daily chart below:
Unlike most ETF families, the HOLDRS series of ETFs are not well diversified. As such, the performance of any leading stock in the sector can have a major bearing on the price of the ETF itself. In the case of HHH, Yahoo! currently represents a weighting of just over 21%. Amazon and eBay are the other heavyweights in the ETF, representing a weighting of approximately 50% between the two stocks. Based on the bullish after-hours price action in Yahoo! that followed its earnings report, our decision to cover HHH ahead of earnings worked out well. Since just about every major company will be reporting their quarterly earnings in the coming weeks, be aware of any lesser-diversified ETFs you may be holding. The respective web sites of the various ETF families provide detailed breakdowns of each fund’s top holdings.
The second action we took yesterday was buying the U.S. Natural Gas Fund (UNG). In yesterday’s commentary, we analyzed the setup in UNG, specifically mentioning the idea of buying it on a slight pullback. That’s exactly what we did, buying UNG on its opening gap down. The trade is basically flat from our entry point, but the price action on the daily chart looks good. Yesterday’s low was above Monday’s low, and UNG has begun a short-term consolidation at the high. Odds are good that it breaks out above the range within the next several days. As always, we are maintaining a protective stop just in case it doesn’t. Our stop is below new support of the prior downtrend line and the 50-day MA.
Yesterday, the small-cap Russell 2000 broke down below support of its intermediate-term uptrend line, causing the iShares Russell 2000 (IWM) to do the same. Our short position in IWM is currently showing a decent unrealized gain since our October 11 entry, but we need to be careful and watch the position carefully today. This is because IWM closed right at support of its 20-day EMA, which also converges with support of its prior high. The break of the uptrend line, as well as the confluence of support levels, is illustrated on the daily chart of IWM below:
If IWM shows a lot of relative strength today and holds up beyond its opening gap, we may tighten the stop in order to reduce our risk exposure. However, patience is also required because IWM could conceivably bounce modestly off the 20-day EMA, then plunge below it due to resistance of the uptrend line it just fell below. For now, our original downside price target of the 200-day MA remains.
After the close, IBM, Intel, and Yahoo! all announced solid quarterly earnings reports. The reaction had a positive effect on the Nasdaq in after-hours trading, as Intel and Yahoo! each comprise a large percentage of the index. This positions the major indices, particularly the Nasdaq, for a bullish open today. Whether or not traders sell into strength of the opening gap up will tell us a lot about the current sentiment of the market. It may be wise to lay low with new long entries this morning, at least until ensuring the Nasdaq will hold the opening gap throughout the first hour of trading.
There are no new setups in the pre-market today. As always, we will send an intraday e-mail alert if/when we come across anything new during the session.
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):
IWM short (350 shares from October 11 entry) – sold short 83.72, stop 85.21, target 80.70, unrealized points + 1.78, unrealized P/L + $623
LQD long (350 shares from August 31 entry) – (see notes below regarding dividend distributions)
bought 104.99 (avg.), stop 104.32, target 107.48, unrealized points + 1.50, unrealized P/L + $525
UNG long (250 shares from October 16 entry) – bought 41.16, stop 38.23, target 46.40, unrealized points (0.14), unrealized P/L ($35)
Closed positions (since last report):
HHH short (300 shares from October 12 entry) – sold short 66.36, covered 65.14, points + 1.22, net P/L + $360
Current equity exposure ($100,000 max. buying power):
Per intraday e-mail alert, we covered HHH into yesterday morning’s gap down. We also bought UNG on the opening gap down. Trade details listed above.
On September 4, LQD traded ex-dividend, with a dividend distribution of 49 cents per share. On October 1, LQD traded ex-dividend and paid out 48 cents per shares. Unrealized points and P/L figures include these distributions.
Edited by Deron Wagner,
MTG Founder and