Stocks valiantly attempted to recover the previous day’s losses throughout the morning session, but the bears firmly took control in the afternoon, erasing early gains and sending the major indices to sharply negative territory. After slicing through their prior day’s lows, the main stock market indexes bounced off their lows in the final ninety minutes of trading. The Nasdaq Composite lost 0.4%, the S&P 500 0.6%, and the Dow Jones Industrial Average 0.8%. The S&P Midcap 400 managed to close flat, as the small-cap Russell 2000 slipped 0.3%. Like the previous day, the major indices finished near the bottom third of their intraday ranges.
Turnover swelled in both exchanges, causing the S&P 500 and Nasdaq Composite to each register a bearish “distribution day.” Total volume in the NYSE increased 13% above the previous day’s level, while volume in the Nasdaq similarly rose 14%. The substantially higher trading activity caused NYSE volume to exceed its 50-day average level for just the second time within the past two months. Considering that lower prices accompanied the increased turnover, it’s evident that yesterday’s selling was driven by institutional trading. Still, market internals weren’t overly negative. In both the NYSE and Nasdaq, declining volume exceeded advancing volume by a narrow margin of approximately 3 to 2. This ratio tells us it was a down day overall, but not an extremely bearish one.
In the May 30 issue of The Wagner Daily, we pointed out the potential short to intermediate-term top that was forming in the price of the crude oil commodity, as well as several oil-related ETFs. After subsequently trading in a tight range for two days, crude oil broke down to close below support of its 20-day EMA for the first time since May 1. The recent crude oil correction has created a few short-term ETF trade setups that could yield considerable profits within a projected time horizon of just a few days. To illustrate this, take a look at the daily chart of the S&P Energy SPDR (XLE):
After dropping to support of its 20-day EMA on May 23, XLE bounced sharply two days later, but the enthusiasm quickly faded. XLE stalled upon touching its 10-day MA (the dashed line), then chopped around in a range during the three days that followed. Yesterday, XLE dropped sharply to close below the low of its recent range, finishing well below its 20-day EMA as well. If XLE moves below yesterday’s low, we would expect a test of the 50-day MA within the next several days. You could either short below yesterday’s low, OR wait for a sell-off down to the 50-day MA, then short the first bounce into new resistance of the 20-day MA. The first option provides greater profit potential, but is slightly higher risk than the latter option. The Oil Service HOLDR (OIH) also has a similar chart pattern to XLE.
Yesterday, we sent an Intraday Trade Alert to regular subscribers, informing them we were buying the UltraShort Oil and Gas ProShares (DUG). Like the entire “UltraShort” family of ETFs, DUG is designed to move in the opposite direction of the underlying sector, and at a leveraged ratio of 2 to 1. We bought DUG as it moved above the high of its recent consolidation, opposite of how XLE fell below the low of its recent consolidation. The entire UltraShort family of ETFs provide excellent opportunities for profiting in bear markets, as there’s never a need to worry about share availability for selling short. Further, they enable investors to take bearish positions in a non-marginable, cash account such as an IRA or 401k. Below is the daily chart of DUG:
If you are short any of the financial ETFs we’ve been discussing over the past week, an extra ounce of caution might be a good idea. Yesterday, both the Banking Index ($BKX) and Securities Broker-Dealer Index ($XBD) probed below key support of their significant lows, but reversed to close above them. These key tests of support in the financial sectors explain the choppiness in the UltraShort Financials ProShares (SKF), which keeps trying to break out above its recent range, but is having trouble doing so. Take the $BKX Index, for example, which dipped to a new multi-year low on an intraday basis, but reversed to close above it’s prior intraday low from March of this year:
Although it’s still well above its 52-week low, the $XBD Index similarly dipped below key support of its prior low from last month, but reversed to close above it. When ETFs trade briefly trade below key support levels, but reverse to close above them, it is known as an “undercut.” Undercuts are bullish and often lead to swift reversals higher because they trap the bears who sold short the expected break down to a new low, forcing them to quickly cover their short positions. This, in turn, attracts the value buyers, who spot a low-risk opportunity in buying an ETF that has undercut a prior low. This all serves for reversals to quickly happen. Note that a closing price below the low of the undercut day invalidates the favorable odds of a bullish reversal. Therefore, as long as the $BKX and $XBD indexes hold above yesterday’s lows, caution should be used on the short side of the financial sectors, including ETFs such as SKF.
Taking a quick, updated look at the major indices, the most notable change is that the S&P 500 closed below its 50-day MA yesterday. It was the first time it has done so since April 15. Just as importantly, the Dow closed below its May low. Continuing to show the most relative weakness, it was the first of the broad-based indexes to do so. The Nasdaq Composite is still desperately clinging to support of both its 20-day EMA and intermediate-term uptrend line from its March low. However, a close below yesterday’s low would cause both of those support levels to break, causing the Nasdaq to follow-through on its “head and shoulders” pattern an join the bear party as well. Our near-term bias remains bearish overall, the intermediate-term bias is neutral (until the rest of the major indices form a significant “lower low” like the Dow), and the long-term bias is bearish.
There are no new setups in the pre-market today. We’ll just focus on managing our existing positions for maximum profitability. If we enter anything new, we’ll promptly send an Intraday Trade Alert. An entry into UltraShort S&P 500 ProShares (SDS) is a possibility if the S&P 500 confirms the break of its 50-day MA by falling below yesterday’s low.
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 bought DUG yesterday. Trade details listed above.
- SKF, which we’ve been stalking for potential trade entry, is best served as a daytrade for advanced traders. Its recent attempts to break out above its trading range have been choppy and unpredictable. If it convincingly breaks out, we may “officially” enter, but probably not.
DXD long (350 shares – 175 entered May 29, 175 on June 2) – bought 52.98 (avg.), stop 51.72, target 57.85, unrealized points = + 1.85, unrealized P/L = + $648
DUG long (350 shares from June 3 entry) – bought 29.60, stop 27.48, target 33.85, unrealized points = + 0.14, unrealized P/L = + $49
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
Edited by Deron Wagner,
MTG Founder and