Commentary:
After beginning the day on a negative note, the major indices recovered and grinded their way higher throughout the session, but a pullback in the final hour of trading caused stocks to finish with mixed results. The Nasdaq Composite scored a respectable 0.8% gain, as relative weakness in the blue chips caused the Dow Jones Industrial Average to lose 0.3%. The benchmark S&P 500 was unchanged. The small-cap Russell 2000 and S&P Midcap 400 indices jumped 1.0% and 0.8% respectively. The Dow finished at the middle of its intraday range and the Nasdaq closed near its best level of the day.
Yesterday’s indecisive and choppy price action in the broad market was aided by a significant decline in turnover. Total volume in the NYSE was 7% lighter than the previous day’s level, while volume in the Nasdaq eased 11%. Turnover in both exchanges limped in at its lowest levels this month. Although the Nasdaq Composite has climbed 2.9% over the past two sessions, a decreased number of shares changed hands both times. Until stocks begin registering a few sessions of higher volume gains, indicating demand on the part of institutions, one must remain suspicious of the bounce off last week’s lows.
The ETFs that track the price of spot gold and silver commodities have been quite choppy over the past month, but yesterday they once again attempted to break out of their trading ranges. The StreetTRACKS Gold Trust (GLD) gapped 2.8% higher on the open, but retraced to close 1.4% higher. Silver shined brighter than gold, as the iShares Silver Trust (SLV) retained 3.8% of its impressive 5.6% opening gain. Even though it’s been all over the board in recent weeks, we bought SLV yesterday, near its intraday low, because we really like the risk/reward of entry near current levels. Take a look at the daily chart of SLV below:
The dashed horizontal line on the chart above, around the $161 level, marks the major area of support that has developed over the past three months. This tells us commodities traders have not been willing to let spot silver fall below the $16/ounce level, as the share price of SLV is roughly designed to trade at ten times the price of one ounce of silver. Yesterday, SLV gapped to open above its 50-day moving average, but pulled back to close just below it. Nevertheless, there’s a good chance SLV will finally break out above its three-month downtrend line from its all-time high (the descending red line).
Since yesterday was the third time SLV attempted to break out above its 50-day MA since mid-May, the time between each breakout attempt has been getting much shorter, increasing the likelihood of a breakout eventually “sticking.” Further, the major area of price support at the $160 to $163 range should act as a floor to propel SLV higher. On a longer-term basis, SLV has been in a primary uptrend since August of 2007. Even though we bought ahead of the actual break of the three-month downtrend line, we felt it was a great risk/reward ratio to buy SLV when it pulled back several points off the high of yesterday’s big opening gap up.
In yesterday morning’s commentary, we pointed out the bearish reversal of momentum in the CurrencyShares Euro Trust (FXE), as well as the potential downward reversal setting up in the Market Vectors Steel (SLX). Both moved higher alongside of the broad market yesterday, but the bearish setups remain intact. Another industry sector ETF setting up for potential short entry is the iShares DJ Transportation Average (IYT):
On June 5, IYT broke out above a short-term base of consolidation to close above the $98 level. However, resistance of its all-time high, set back in July of 2007, aided in immediately causing the breakout attempt to fail the next day. As we frequently discuss, failed breakouts above consolidation often lead to good short setups because the “trapped bulls” cause momentum to reverse rapidly, thereby attracting the interest of the bears as well. In this case, notice that IYT plunged below pivotal support of its 50-day moving average just four days after breaking out to a new high.
Because stocks and ETFs frequently snap back above their 50-day moving averages after a one-day shakeout of the “weak hands,” we did not point out the break of 50-day MA support as a short setup right away. However, notice how IYT has been unable to move back above its 50-day MA in each of its three successive attempts. This clearly demonstrates that prior support of the 50-day MA has become the new resistance. As such, we like IYT for short entry if it falls below yesterday’s low. A protective stop could simply be placed above the high of the past two days, perhaps even above the 20-day MA if you want to give the setup more “wiggle room.”
Today’s Watchlist:
iShares DJ Transportation Avg. (IYT)
Short
Shares = 200
Trigger = 91.42 (below yesterday’s low)
Stop = 94.38 (above the 20-day EMA)
Target = 86.18 (support of the 200-day MA)
Dividend Date = around June 24, 2008
Notes = See commentary above for explanation of this setup.
Market Vectors Steel (SLX)
Short
Shares = 150
Trigger = below 102.31 (below the 50-day MA and yesterday’s low)
Stop = 106.70 (above the 20-day EMA)
Target = 91.18
Dividend Date = December 2008
Notes = This setup from yesterday did not yet trigger, but remains on our watchlist going into today. Note the updated share size and trigger price. See commentary in yesterday’s Wagner Daily for explanation of this setup.
KEY TIP: Be aware that SLX and/or IYT may be on your broker’s “hard to borrow” list. This means your brokerage firm’s web site may initially tell you that shares are not available for shorting. But if this occurs, we recommend you phone your broker and specifically ask them to locate shares to borrow for short selling. With a little push, your firm should easily be able to call around and get shares for you within a matter of minutes. If not, consider switching to a different firm who offers a wider selection of stocks and ETFs for shorting. Just a little advice for those of you who run into this issue.
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 SLV yesterday.
- SLX did not yet trigger, but remains on today’s watchlist. IYT is also being target for potential entry today.
-
RSX long (400 shares from June 13 entry) – bought 55.55, stop 54.22, target new high (will trail stop), unrealized points = + 0.17, unrealized P/L = + $68
SLV long (150 shares from June 3 entry) – bought 170.72, stop 166.30, no specific target (will trail stop), unrealized points = (1.22), unrealized P/L = ($183)
DUG long (350 shares from June 3 entry) – bought 29.60, stop 27.13, target 33.85, unrealized points = (1.66), unrealized P/L = ($581)
Closed positions (since last report):
-
(none)
Current equity exposure ($100,000 max. buying power):
- $57,492
Notes:
Edited by Deron Wagner,
MTG Founder and
Head Trader