Commentary:
Stocks trended steadily higher throughout the first half of yesterday’s session, but the broad market swiftly turned tail in the afternoon. The Nasdaq Composite, up 0.9% at its mid-day high, finished 0.5% lower. The S&P 500 and Dow Jones Industrial Average surrendered matching intraday gains of 1.1% to finish higher by just 0.1% and 0.3% respectively. Both the small-cap Russell 2000 and S&P Midcap 400 fell 0.3%. All the major indices settled in the bottom third of their intraday ranges, indicating the bears had control into the close.
Total volume in the NYSE eased 14%, as turnover in the Nasdaq dipped 2% below the previous day’s level. If not for last Friday’s volume levels being inflated by monthly options expiration, turnover probably would have exceeded the prior day’s activity. As such, it’s a bit deceiving to say yesterday’s slightly lower volume in the Nasdaq was positive. Rather, the price to volume relationship was probably more akin to a bearish “distribution day.” Declining volume in the Nasdaq exceeded advancing volume by a margin of 2 to 1. The NYSE adv/dec volume ratio was flat.
Two months ago, the beaten-down financial sector found support and began to bounce from its “oversold” condition. It made up some ground with a tradeable, countertrend bounce, but our analysis of the banks, insurance companies, and securities broker-dealers shows they may again be ready to resume their primary, long-term downtrends. As an ETF proxy of the financial sector’s performance, check out the UltraShort Financials ProShare (SKF), which is designed to move in the opposite direction of an index of financial stocks.
As you can see on the daily chart below, SKF broke out above its hourly downtrend line and 20-day exponential moving average yesterday. Further, it’s coming out of a tight base of consolidation that has key support of its 200-day moving average just below:
Though a few after-hours trades caused SKF to officially finish below $102, it actually traded all the way through the $103 level just fifteen minutes before the closing bell. Per Intraday Trade Alert to subscribers of The Wagner Daily, we bought SKF at $102.23 late yesterday, when it rallied above its opening high, its three-day high, and hourly downtrend line. As you might have guessed, our protective stop is below support of the 200-day MA. We really like the reward/risk ratio of this setup, as the potential upside profit is much greater than our downside risk, especially if the broad market starts to see further weakness. Note that SKF traded all the way up to the $150 level just two months ago, but our target is the area of the April 2008 highs, around the $119 level. The shorter-term hourly chart below illustrates our entry point during yesterday’s late-day breakout:
In yesterday morning’s commentary, we said all eyes would be focused on the price action of the S&P 500 and Dow Jones Industrial Average as they tested their 200-day moving averages. Specifically, we said, “Now that the S&P and Dow have come this far, we could at least expect an intraday probe above their 200-day MAs. Whether or not they manage to close above their 200-day MAs is another story. Rarely will a breakout above the 200-day MA be successful on the first attempt.” Yesterday, the S&P 500 traded well above its 200-day MA on an intraday basis, undoubtedly triggering a bunch of traders’ stops, but sold off to close just below its 200-day MA. As we said yesterday, such price action was exactly what one might have expected. The daily chart of the S&P 500 below demonstrates the magnetic quality of its 200-day MA.
If you think the S&P 500 formed an “inverted hammer” candlestick yesterday, you’re correct. However, given the stock market’s indecisive price action lately, we’re not putting much faith into its bearish implication. Notice the S&P 500 also formed an “inverted hammer” on May 14, but went on to close above that day’s high in the following session. Nevertheless, odds of further downside in the near term may be greater this time because the pattern also coincides with a reversal at the 200-day MA. On May 14, the index had not yet tested its 200-day MA, and it may have been too obvious that the index would eventually do so.
The Dow Jones Industrial Average actually closed a few points above its 200-day MA yesterday, but certainly not by a wide enough margin to declare a breakout above that pivotal resistance level. Notice how the Dow reversed after running into resistance of its May 2 high (the red horizontal line on the daily chart below):
When we bought the inversely correlated UltraShort Dow 30 ProShares (DXD) on May 7, we set our protective stop just below the May 2 low (equivalent to just above the May 2 high on the underlying Dow index). Fortunately, we followed the rule of always giving enough “wiggle room” when setting stops above or below clearly defined levels of price resistance. The Dow traded a few points above its May 2 high, causing DXD to fall just a few cents below its May 2 low, before reversing. Because we gave our stop enough “wiggle room” below the May 2 low, DXD missed our stop by 8 cents yesterday. As such, we remain long DXD with the same stop of $48.89. We’re also long both UUP and GLD, the latter of which is continuing to act great.
Today’s Watchlist:
There are no new setups in the pre-market today. As always, we’ll 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):
- Per Intraday Trade Alert, we lowered the entry price of SKF, which triggered in the final thirty minutes of trading.
- DXD missed our stop by 8 cents yesterday.
- GLD continues to act well.
- UUP has been a disappointment since our entry. Although the dollar has been strengthening against the euro, it has not increased as much against other foreign currencies, which is what UUP is based on. If UUP does not breakout higher in the next several days, we’ll probably just scratch the trade to free up buying power.
-
GLD long (250 shares from May 15 entry) – bought 87.33, stop 84.78, target 93.20, unrealized points = + 2.06, unrealized P/L = + $515
UUP long (1,300 shares from April 25 entry) – bought 22.68 (avg.), stop 22.39, target 23.72, unrealized points = + 0.03, unrealized P/L = + $39
SKF long (100 shares from May 19 entry) – bought 102.23, stop 96.88, target 119.20, unrealized points = (0.42), unrealized P/L = ($42)
DXD long (350 shares from May 7 entry) – bought 50.79, stop 48.89, target 56.30, unrealized points = (1.23), unrealized P/L = ($430)
Closed positions (since last report):
-
(none)
Current equity exposure ($100,000 max. buying power):
- $79,397
Notes:
Edited by Deron Wagner,
MTG Founder and
Head Trader