Just as Tuesday’s roaring session sent the bears running for cover, yesterday’s sell-off kept the bulls on their toes. Stocks retraced sharply, causing the major indices to give back all their post-Fed gains. Both the S&P 500 and Dow Jones Industrial Average fell 2.4%, while the Nasdaq Composite and small-cap Russell 2000 suffered matching declines of 2.6%. The S&P Midcap 400 lost 2.5%. Completely opposite of the previous day’s action, all the main stock market indexes finished at their dead lows of the day. As the bulls and bears battle it out, violent, whipsaw price action from day-to-day has become the norm.
Turnover was mixed. Total volume in the NYSE ticked 3% higher, as 4% less shares changed hands in the Nasdaq. It was the third consecutive day of less than average volume in the Nasdaq. In both exchanges, declining volume exceeded advancing volume by approximately 4 to 1. Considering Tuesday’s incredibly positive 19 to 1 adv/dec volume ratio in the NYSE, yesterday’s negative ratio of 4 to 1 on the pullback wasn’t too bad.
In the March 18 issue of The Wagner Daily, we noted that commodity ETFs had possibly begun to enter a corrective phase. That day, we began stalking short setups in ETFs comprised of oil stocks, as they were generally looked weaker than the crude oil commodity itself. Along with practically every other sector, oil and oil stocks bounced with the broad market that day, but the sector subsequently moved sharply lower yesterday. The S&P Energy SPDR (XLE) has now confirmed the break of its intermediate-term uptrend line, as well as its 20, 50, and 200-day moving averages. With yesterday’s close below its March 17 low, odds are good that XLE now moves lower to test its January/February lows in the near future. The confirmed break of support is shown on the daily chart of XLE below:
Upon noting yesterday’s major relative weakness in the oil sector, we bought the inversely correlated UltraShort Oil and Gas ProShares (DUG) when it broke about above the previous day’s high. We initially targeted it for entry on March 18, but it didn’t trigger until yesterday. Not only did DUG break out above its 50-day MA and intermediate-term downtrend line yesterday, but it did so on much higher than average volume. This tells us that institutions were actively selling energy-related shares:
Although the 200-day MA of DUG is just overhead, we’re not overly concerned about it. In this case, the 50-day MA has been acting as a more pivotal level of support and resistance, while the break of the intermediate-term downtrend line should generate enough momentum to zoom through the 200-MA. Even if DUG happens to run out of gas at its 200-MA, which we doubt, we can still close the trade for a nice gain because we bought it just over yesterday’s high. Presently, the DUG position is showing an unrealized gain of just under 2 points. Conversely, our long position in the Ultra QQQ ProShares (QLD) is feeling some heat after yesterday’s sell-off, but we’re still hanging in there. Our original stop is still below the March 18 low.
Given the magnitude of Tuesday’s gains, a minor pullback yesterday would not have been surprising. However, the S&P, Nasdaq, and Dow each retraced about 50% (or slightly more) of their gains from their March 17 lows to March 19 highs. As you may recall from our regular discussions on Fibonacci retracements, 50% pullbacks are still acceptable, but the rally attempt will be in major jeopardy if the stock market indexes retrace more than 61.8% of their ranges. Simply put, we remain cautiously bullish on the near-term direction of the broad market, just as long as yesterday’s lows in the S&P, Nasdaq, and Dow are not violated by a significant amount. Closing prices firmly below yesterday’s lows would immediately shift our near-term bias to neutral. Intermediate and long-term trends remain bearish.
There are no new setups in the pre-market today. As always, we will promptly send an Intraday Trade Alert if/when we enter anything new.
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):
DUG long (300 shares from March 19 entry) – bought 40.22, stop 37.82, target 48.90, unrealized points = + 1.77, unrealized P/L = + $531
QLD long (200 shares from March 18 entry) – bought 67.70, stop 64.58, target 74.82, unrealized points = (2.00), unrealized P/L = ($400)
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
Per Intraday Trade Alert, we bought DUG when it moved above the previous day’s high. It’s looking pretty good so far. No changes to the QLD stop.
Edited by Deron Wagner,
MTG Founder and