Commentary:
Stocks opened slightly lower yesterday morning, quickly stabilized, then traded in a choppy, sideways range throughout the day. The major indices eventually closed with mixed results and near the flat line. The S&P 500 slipped 0.1%, the Dow Jones Industrial Average gained 0.1%, and the Nasdaq Composite advanced 0.4%. The small-cap Russell 2000 and S&P Midcap 400 indices were lower by 0.1% and 0.5% respectively. Most of the main stock market indexes settled near the middle of their intraday ranges, but the Nasdaq Composite finished in the upper third of its range.
Total volume in the NYSE receded 5%, while volume in the Nasdaq similarly declined 3% below the previous day’s level. Given the uneventful price action of the broad market, the lower turnover was of little significance. Like the closing prices, market internals were mixed. Advancing volume in the Nasdaq beat declining volume by nearly 2 to 1. The NYSE adv/dec volume ratio was fractionally negative.
Yesterday, many of the commodity ETFs, as well as the relatively strong basic materials ETFs, took a break from their recent gains. We made a judgment call to scratch our position in the iShares Basic Materials (IYM) because it is deliberating at pivotal resistance of its breakout. Two exceptions to yesterday’s pullback were the StreetTracks Gold Trust (GLD) and iShares Silver Trust (SLV), both of which zoomed to fresh highs. Though it’s discussed much less frequently than gold, spot silver has actually been showing substantial relative strength to gold. To illustrate this, take a look at the percentage change overlay chart of the popular gold ETF (GLD) versus silver (SLV):
For those of you who attended one of my recent seminars on relative strength trading of ETFs, the chart above is a good example of the type of divergent pattern we like to see when comparing various ETFs within the same family. Taking a closer look at the hourly chart above, notice that GLD and SLV began showing divergence on February 22. That day, GLD was basically flat, but SLV gained more than 1%. If using overlay charts to compare sectors on a daily basis, one could have acted on that bullish divergence by buying SLV the next morning. The relative strength in SLV obviously intensified, as SLV outperformed GLD by approximately 5% just three days later. When precious metals begin pulling back to support of their 10 or 20-day moving averages on the daily charts, one might consider SLV over GLD on the next entry.
Taking an updated look on the international front, keep an eye on the iShares Xinhua China 25 (FXI). After correcting from its amazing run over the past four months, it appears FXI may be forming a substantial bottom. Take a look at its daily chart below:
From mid-January through mid-February, FXI kept trying to go lower, but continually found support at the $136 to $137 area. Since then, it has begun to climb off its lows. Yesterday, it closed just shy of both its 200-day MA and four-month downtrend line. Notice how the downtrend line also converges with resistance of the 50-day MA. There’s obviously three significant levels of resistance FXI must contend with right now, but a confirmed rally above its 50-day MA would be quite bullish. We’ll be monitoring the price action of FXI in the coming days, with the intention of buying a clean breakout above the triple convergence of resistance. As always, be careful not to “jump the gun” ahead of the actual breakout. Doing so can be quite dangerous, especially in a bear market.
While on the subject of international ETFs, it’s interesting to note that iShares Brazil (EWZ) has recovered all the way to a new all-time high. Its breakout is shown on the daily chart below:
We’d prefer to wait for a bit of consolidation or slight pullback before buying EWZ, especially with the S&P and Dow at resistance of their 50-day MAs. Nevertheless, keep EWZ on your radar. It is perhaps showing the most relative strength of any international ETF right now.
As for the domestic stock markets, all eyes are on whether or not the S&P and Dow will overcome resistance of their pivotal 50-day moving averages. So far, the initial test of resistance has been pretty lame, but it doesn’t mean we won’t at least see a “stop hunt” with a rush of momentum above the 50-day MAs. Conversely, the recent rally off the lows has made the risk/reward of new short entries more attractive. We’ll consider selling short a broad-based ETF or two if the major indices begin breaking below yesterday’s lows. Until then, we remain neutral on the short-term direction of the broad market. Regardless of short-term strength along the way, don’t forget we’re still in a confirmed bear market. Stay on guard to prevent potentially getting led like a lamb to the slaughter.
Today’s Watchlist:
UltraShort Dow 30 ProShares – DXD
Long
Shares = 400
Trigger = 54.82 (above yesterday’s high and 50-day MA)
Stop = 53.22 (below the 2-day low)
Target = 59.85 (test of Feb. 11 “swing high”)
Dividend Date = approx. March 21, 2008
Notes = We were stalking this setup for entry yesterday, but it did not trigger. It remains on our watchlist going into today.
As per our commentary above, we are also watching FXI for potential long entry, but we first want to assess action in the domestic markets before getting new long positions. International ETFs can still carry a significant degree of correlation to the U.S. markets. We’ll promptly send an intraday e-mail alert if we buy FXI.
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):
-
(none)
Closed positions (since last report):
-
IYM long (200 shares from February 26 entry) – bought 79.81, sold 79.89, points = + 0.08, net P/L = + $12
Current equity exposure ($100,000 max. buying power):
- $0
Notes:
Per intraday e-mail alert, we made a judgment call to use a tight, breakeven stop on IYM. It triggered later in the day, so we scratched the trade. We subsequently were stalking DXD for potential long entry, but it did not hit our trigger price for entry. It remains on our watchlist for potential entry today.
Edited by Deron Wagner,
MTG Founder and
Head Trader