The Bear Stearns news over the weekend caused trading to get off to a scary start yesterday morning, but the market quickly stabilized. After opening approximately 2% lower, the major indices valiantly attempted to reverse throughout the morning. The bears arrived at mid-day, sending the broad market back to new intraday lows, but the bulls returned in the afternoon. By the closing bell, the major indices had settled with mixed results. Blue chips showed relative strength, enabling the Dow Jones Industrial Average to eke out a 0.2% gain. The S&P 500 lost 0.9% and the Nasdaq Composite fell 1.6%. Small and mid-cap stocks lagged behind. The Russell 2000 and S&P Midcap 400 indices slid 1.9% and 2.1% respectively. Confirming yesterday’s indecision, the main stock market indexes closed near the middle of their intraday ranges.
Turnover was mixed. Total volume in the NYSE increased 10% over the previous day’s level, while volume in the Nasdaq receded 6%. Despite the positive close in the Dow, market internals across the board were firmly negative. Declining volume exceeded advancing volume by a margin of just over 3 to 1 in both the NYSE and Nasdaq.
Over the past several weeks, we’ve highlighted various commodities ETFs that have a low correlation to the direction of the overall stock market. If you’re seeking additional opportunities for ETFs that trade largely independent of the main stock market indexes, don’t forget about the CurrencyShares family of ETFs. You may already be familiar with the CurrencyShares Euro Trust (FXE), which mirrors the price of the euro compared to the U.S. dollar. Since breaking out of a 4-month base in late February of this year, FXE has zoomed to new highs every week. However, don’t forget to check the chart patterns of other currencies in that ETF family as well. The CurrencyShares Japanese Yen (FXY), for example, has also been on a tear. Recently, it’s even begun showing relative strength to the euro. Note the bullish gap to a new all-time high on the FXY daily chart below:
Along with the euro and yen, the Swiss franc (FXF) has ripped to a new high. In our opinion, these ETFs are now too extended for new long entry at current levels. Still, keep an eye on them when they begin to pull back. For a complete list of the available CurrencyShares ETFs, download our free Morpheus ETF Roundup, which will be updated to include other new ETFs within the next month or so.
Commodity ETFs, the only group of ETFs that have ignored the stock market’s weakness in recent months, corrected sharply yesterday. A nice pullback to support of their primary uptrend lines and/or 20-day moving averages may provide us with low-risk entry points on the buy side. However, those who are already positioned in the commodity ETFs may wish to take profits, or at least trail very tight stops now. Since the commodity ETFs and the value of the U.S. dollar have had an inverse relationship lately, the pullback in commodity ETFs may be preceding an upcoming bounce in the dollar. If that occurs, we can expect the above currency ETFs to correct significantly too.
Yesterday’s pullback in the silver (SLV) and gold (GLD) commodity ETFs was minimal. Both continue to hold very near their all-time highs, and well above their 20-day EMAs. But the PowerShares Agriculture Fund (DBA) dropped all the way down to its 50-day MA. Since its uptrend has been so strong, it was the first time DBA has even touched its 50-day MA since last August. This is shown below:
In addition to the agriculture ETFs, the U.S. Oil Fund (USO) and U.S. Natural Gas Fund (UNG) both corrected significantly off their highs yesterday. Because they’re still so close to their highs, there’s little price resistance to prevent them from quickly moving back up. As such, we do not recommend selling short USO or UNG. Since the stocks within a sector do not always trade in sync with the associated commodity, several energy ETFs comprised of oil and gas stocks are actually poised to break key support and roll over. The S&P Energy SPDR (XLE), for example, sliced below support of both its 50 and 200-day moving averages yesterday:
Not only did XLE close below two pivotal moving averages, it also fell below support of its intermediate-term uptrend line off the January 2008 low. On the long-term weekly chart, it also formed a “lower high” when the February high ran out of gas before moving back to the prior high from early January. This tells us that short, intermediate, and long-term trends are all favorable for short entry. With a plethora of overhead supply to contend with, we now like XLE for short entry below yesterday’s low. Other ETFs comprised of energy stocks have similar patterns. The Oil Service HOLDR (OIH), iShares Energy (IYE), Vanguard Energy (VDE). If you have a non-marginable cash account, the inversely correlated UltraShort Oil and Gas ProShares (DUG) can be considered for long entry. Regular subscribers to The Wagner Daily should note our detailed trigger, stop, and target prices for the DUG setup below. Note that its chart pattern is basically a mirror image of XLE.
As for the broad market, there’s not much to say until we see the reaction to this afternoon’s Federal Reserve Board meeting on economic policy at 2:15 pm ET. As always, expect high volatility and whippy trading conditions immediately following the announcement. Consider having a list of both buy and short selling candidates for possible entry late in the day. Being prepared for a post-Fed reaction in either direction is the smart way to play it.
UltraShort Oil and Gas ProShares – DUG
Shares = 250
Trigger = above 42.27 (over yesterday’s high)
Stop = 39.18 (below support of yesterday’s low, prior downtrend line, and 20-day EMA)
Target = 49.30 (resistance of prior high from Feb. 7)
Dividend Date = est. March 26, 2008
Notes = See commentary above for explanation of this setup. Also, we’re aware of the 200-day moving average overhead, but this ETF has conformed much closer to the pivots of the 50-day MA. The breakout above the intermediate-term downtrend line and 50-day MA should be more significant than the 200-day MA in this case. If DUG deliberates around its 200-day MA, we can easily scratch the trade, but we expect it to rapidly move higher if it breaks out above yesterday’s high. As always, be careful not to “jump the gun” ahead of the specific trigger price for entry.
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):
Closed positions (since last report):
QLD long (300 shares from March 13 entry) – bought 65.86 (avg.), sold 62.50, points = (3.36), net P/L = ($1,014)
Current equity exposure ($100,000 max. buying power):
We used the MTG Opening Gap Rules to manage the QLD position because it gapped open below our original stop price. Doing so initially helped the position, as the market began to rally right after the opening gap down. However, the mid-day sell-off took QLD down to a new intraday low and stopped us out. Because of the gap, we stopped out of QLD with a full loss. Regardless of the loss, we remain on track for a profitable month and one of our best quarters ever, despite the steep losses in the stock market. Remember that consistent, profitable trading over the long-term comes just from playing the law of averages. We will never win them all!
Edited by Deron Wagner,
MTG Founder and