Commentary:
Another relatively quiet session ahead of today’s Fed meeting caused stocks to close with mixed results. Showing indecision throughout the day, the S&P 500 lost 0.4% and the Dow Jones Industrial Average fell 0.3%. The Nasdaq Composite, however, bucked the trend by gaining 0.1%. The tech-dominant Nasdaq 100 fared even better by climbing 0.5%. The small-cap Russell 2000 and S&P Midcap 400 indices shed 0.9% and 0.7% respectively. The Nasdaq Composite finished in the upper half of its intraday range, but the rest of the indexes settled near the bottom third of their ranges.
Total volume in the NYSE rose 2% above the previous day’s level, causing the S&P 500 to register a bearish “distribution day,” the third such occurrence in recent weeks. Nevertheless, the slight increase in turnover kept trading below average levels. Overall volume in the Nasdaq was 2% lighter than the previous day’s level. Like the closing prices of the main stock market indexes, market internals were mixed. Declining volume in the NYSE slightly exceeded advancing volume. The adv/dec volume ratio in the Nasdaq was marginally positive.
In today’s announcement on economic policy from the Fed at 2:15 pm ET, most economists are expecting a modest quarter-point reduction in the Fed funds rate. What Wall Street does not agree on is whether or not the Federal Open Market Committee (FOMC) will signal an end to the string of rate cuts that began last September. Regardless of exactly what is announced, one thing is certain; the stock market’s immediate reaction will be volatile.
As discussed yesterday, many of the main stock market indexes are at or near pivotal levels of resistance. The reaction to the Fed announcement should quickly cause the broad market to “make it or break it.” Nevertheless, realize the market’s real reaction is often not seen until several days later. The immediate “knee-jerk” reaction is often deceiving. Because the major indices are likely to be whippy this afternoon, consider avoiding the broad-based ETFs, such as the S&P SPDR (SPY) or Nasdaq 100 Index Tracking Fund (QQQQ), until the direction of their next move becomes clear.
If the Fed implies an end to the interest rate cuts, keep an eye on both the commodity-based ETFs and currency-based ETFs. A weak U.S. dollar has led to massive gains in commodities since last August, but the group could see significant selling pressure if the dollar starts to reverse, thereby creating short sale opportunities. Most likely, that will happen if rate cuts are perceived to be finished for a while. One commodity-based ETF that showed major relative weakness yesterday is the U.S. Oil Fund (USO). Falling 2.8% in just one day, it has dropped to light support of its prior near-term low. A break below that level would lead to a break of the 20-day exponential moving average, leading to at least a short-term reversal of bullish momentum. This is illustrated on the daily chart below:
With USO so close to its all-time high, it’s risky to initiate a short sale and hold for a long time. However, a break of the 20-day EMA could lead to a quick, momentum-driven trade back down to support of its 50-day MA. Just be sure to observe a strict protective stop to guard against a failed breakdown that rips higher. Rather than selling short USO, one might alternatively consider buying the inversely-correlated UltraShort Oil and Gas ProShares (DUG). Moving in the opposite direction of the oil and gas stocks (not the crude oil commodity itself), it’s a great way to take a bearish position on the energy sector in non-marginable cash accounts such as IRAs (which can not hold short positions).
All of the agricultural ETFs have also begun showing relative weakness and may drop even more if the rate cuts stop. Market Vectors-Agribusiness (MOO), for example, sliced through support of its 20-day EMA yesterday and is not very far from breaking support of its 50-day MA as well:
In addition to MOO, another agricultural ETF to check out is PowerShares DB Agriculture Fund (DBA). It is presently sitting at a major level of horizontal price support, but could fall sharply if it breaks down.
Currently, our only open position is the PowerShares U.S. Dollar Index Fund (UUP), which is showing a tight, bullish consolidation on its hourly chart. We expect a breakout above its recent range to follow this afternoon’s Fed announcement. Most of the currency-based ETFs such as CurrencyShares Euro Trust (FXE) could move sharply lower this afternoon, but we bought UUP rather than selling short FXE. Buying UUP is being bullish on the U.S. dollar, while buying FXE is being bullish on the euro (bearish on the dollar).
Today’s Watchlist:
There are no new setups in the pre-market today. We are targeting a few ETFs for potential entry, but will wait until the FOMC meeting before buying or selling short any new positions. We’ll send an Intraday Trade Alert if anything new is entered later this afternoon, though we most likely will wait until the dust has settled tomorrow.
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):
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UUP long (1,300 shares from April 25 entry) – bought 22.68 (avg.), stop 22.27, target 23.72, unrealized points = + 0.09, unrealized P/L = + $117
Closed positions (since last report):
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SLV long (150 shares from April 28 entry) – bought 168.39, sold 163.67, points = (4.72), net P/L = ($711)
Current equity exposure ($100,000 max. buying power):
- $29,601
Notes:
Our SLV loss was larger than we planned for it to be, as we initially had a much tighter stop several points higher. However, all of the loss was due to a big opening gap down, so there was not much to do about it other than follow the MTG Opening Gap Rules. Gold/silver often move in the opposite direction of the U.S. dollar, so we would typically not be long both the dollar and gold/silver. However, we bought SLV for a very short-term trade because it bounced off a major level of price support, looked prime for a reversal on the hourly chart, and had a positive risk/reward for a quick momentum trade. Further, it had been showing divergence to the dollar. Despite all this, the trade simply didn’t work and we were just plain wrong. Professionally taking losses and calmly moving on to the next trade is just part of the business. We’ve been consistently profitable for the past six years because we realize trading is merely a numbers game.
Edited by Deron Wagner,
MTG Founder and
Head Trader