Commentary:
Yesterday was a relatively uneventful day, as stocks opened slightly lower, lethargically drifted sideways throughout the session, then finished flat to modestly lower. The Dow Jones Industrial Average eked out a 0.1% gain, but the S&P 500 and Nasdaq Composite lost 0.2% and 0.4% respectively. The small-cap Russell 2000 declined 0.4%, as the S&P Midcap 400 dropped 0.7%. Indicating a lack of commitment among both the bulls and bears, the major indices finished near the middle of their (quite narrow) intraday ranges for a second straight day.
Turnover was mixed. Total volume in the NYSE ticked 3% above the previous day’s level, while volume in the Nasdaq eased 2%. The S&P 500’s loss on higher volume would normally be representative of a bearish “distribution day,” but trading increased only marginally. Market internals were negative by a narrow margin. In the NYSE, declining volume exceeded advancing volume by less than 3 to 2. The Nasdaq adv/dec volume ratio was negative by a ratio of 2 to 1.
Since the big sell-off on June 6, the main stock market indexes have attempted to recover some of that day’s losses, but have not yet made much headway. This is primarily because a lot of overhead supply was left behind in the wake of that day’s sell-off. Overhead supply is created from investors who did not sell their positions before the market dropped, and are now stuck with positions at higher prices. These people collectively create price resistance, as they will sell into the strength of any bounce, hoping to “just break even.” Only a volume surge, driven by institutional buying, creates enough demand to absorb that supply. Therefore, be sure to pay attention to relative volume levels on any rally attempt that may arise in the coming days. If the rally is not driven by significantly higher turnover, chances are good the bullish reversal attempt will fail. An example of this overhead supply is seen on the daily chart of the S&P 500 SPDR (SPY), a well-known proxy for the S&P 500 Index:
On the chart above, the red horizontal line marks the prior lows from last month. Due to overhead supply from people who bought above that level, that area will now act as the new price resistance. If SPY manages to move above that level, convergence of the 20 and 50-day moving averages will present another obstacle that is likely to keep any rally in check. If SPY (and the S&P 500) falls below the low of the past two days, remember there is major support at the 61.8% Fibonacci retracement level from the March low to the May high. For SPY, that is around the $133 level, which also correlates to support of the April 2008 lows. For the S&P 500, the same area of support is around 1,325. As we mentioned a few days ago, any sell-off down to that level is an ideal place to cover short positions and prepare to begin buying operations as well.
On the plus side, the Nasdaq Composite bounced off key support of both its 50-day MA and May 2008 lows for the second straight day. This level of support was illustrated in yesterday’s commentary. Although the Nasdaq has broken support of its three-month uptrend line, the index has not yet entered into a new intermediate-term downtrend because it has not yet formed a “lower low.” A firm close below the 50-day MA would change the situation, but the index has been surprisingly resilient so far.
After scanning the chart patterns of hundreds of ETFs last night, we found very few ETFs that were set up for ideal buy entry points at current levels. A few strong ETFs are pulling back to support levels, but the low-risk buy entries would come only after breaking out above their hourly downtrend lines. The Market Vectors Russia (RSX), which we briefly mentioned yesterday, is one such example. Because the major indices are still consolidating near their recent lows, we’re not interested in gambling on new buy entries into ETFs that have not yet shown clear signs of bottoming. We’ll be ready when that eventually occurs, but we’re laying low on the long side until then. This is a time to chill; you are not likely to miss much! Remember to trade what you see, not what you think.
Today’s Watchlist:
There are no new pre-market setups today. However, we’ll promptly send an Intraday Trade Alert if/when we enter any new positions today.
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):
- No changes to the open positions above.
-
DXD long (350 shares – 175 entered May 29, 175 on June 2) – bought 52.98 (avg.), stop 54.17, target 57.85 (half position only, will trail stop on remainder),
unrealized points = + 2.54, unrealized P/L = + $889
DUG long (350 shares from June 3 entry) – bought 29.60, stop 26.69, target 33.85, unrealized points = (1.37), unrealized P/L = ($480)
Closed positions (since last report):
-
(none)
Current equity exposure ($100,000 max. buying power):
- $29,312
Notes:
Edited by Deron Wagner,
MTG Founder and
Head Trader