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The Wagner Daily


Commentary:

The major indices followed through on the previous day’s downward momentum yesterday, leading to another round of losses that caused the Dow to close at its lowest level since March 17 of this year. The S&P 500 fell 1.0%, as both the Dow Jones Industrial Average and Nasdaq Composite lost 1.1%. The small-cap Russell 2000 and S&P Midcap 400 registered matching losses of 0.8%. The main stock market indexes finished in the bottom third of their intraday ranges, but it was an erratic, indecisive session, not a steadily downtrending day.

Total volume in the NYSE surged 13% higher than the previous day’s level, while volume in the Nasdaq similarly swelled 12%. The stock market’s losses on significantly higher volume caused both the S&P 500 and Nasdaq Composite to suffer a “distribution day” that was indicative of institutional selling. When the major indices bounced off their recent lows from June 12 – 16, we cautioned that the gains could easily become undone because the rally was occurring on light volume. That’s exactly what has happened over the past two days. Declining volume in the NYSE exceeded advancing volume by approximately 3 to 1. The Nasdaq adv/dec volume ratio was negative by more than 4 to 1.

In the June 9 issue of The Wagner Daily, we discussed the precarious technical position of the Dow Jones Industrial Average. Specifically, we illustrated how the index had fallen below its 61.8% Fibonacci retracement from its March 2008 low to May 2008 high. Because of that occurrence, we said the Dow was likely to fall all the way down to test its March 2008 low. As such, it’s not surprising that the Dow broke down to new recent lows yesterday. With its closing price just above the 12,000 level, the Dow is now just one big down day away from testing key support of its March 2008 closing low of 11,740.

Although the Dow is in danger of tumbling to a new 52-week low, the good news is the index is now sitting on support of its multi-year uptrend line from the March 2003 low. The dashed blue line on the monthly chart below illustrates support of the long-term uptrend line, while the red descending line marks the downtrend the new primary downtrend that began last October:

Because of the long-term uptrend line shown above, one should be cautious on the short side of the market, at least in the near-term. However, the Dow has not yet shown us any bullish confirmation to begin buying at current levels. Trying to catch this falling knife is a risky proposition, as panic selling could rapidly drive the Dow sharply lower if its March 2008 low is broken. We recently realized a large gain from our position in the UltraShort Dow 30 ProShares (DXD), but the current risk/reward ratio for being short the Dow may no longer be very positive — unless the index breaks down to a new 52-week low.

Two days ago, we discussed the likelihood of the iShares Silver Trust (SLV) breaking out above its intermediate-term downtrend line and resuming its long-term uptrend. SLV dropped slightly the following day, but rallied back to its June 16 high yesterday. This means SLV is now forced to test resistance of its downtrend line going into today’s session. This is shown on the daily chart of SLV below:

If it manages to close above its downtrend line today, upside momentum could carry SLV much higher in the near-term. Support of the 20 and 50-day moving averages just below should provide the necessary bounce for the breakout above the tight range. We’re already long SLV from our June 16 entry, and our stop is just below the June 17 low. We want to be out quickly if SLV breaks down below that day’s low, as a failed breakout above the downtrend line could cause it to fall hard. Note that StreetTRACKS Gold Trust (GLD) has a similar chart pattern, but SLV has been showing a bit more relative strength.

Thanks to relative strength in the Russian market, our long position in Market Vectors Russia (RSX) is starting to look pretty good. Over the past two days, the S&P 500 has lost 1.7%, but RSX has gained 1.1% during the same period. When an ETF is showing so much relative strength that it manages to gain while the broad market sell off, what do you think happens when the overall stock market eventually bounces? The ETF typically surges higher, outperforming the percentage gains of most other ETFs in the process. RSX is presently showing an unrealized gain of just under one point since our June 13 entry, but it should zoom higher when the U.S. stock market finds support again. International ETFs can be ideal investment vehicles when the U.S. market is going down, as some international stock markets have a low correlation to the direction of our domestic markets.


Today’s Watchlist:


Market Vectors Steel (SLX)
Short

Shares = 150
Trigger = below 104.28 (below the 15-minute uptrend line)
Stop = 107.70 (above the 2-day high)
Target = 91.18
Dividend Date = December 2008

Notes = This setup did not yet trigger, but remains on our watchlist going into today. Note the updated trigger and stop price. See commentary in the June 16 issue of The Wagner Daily for explanation of this setup.

KEY TIP: Be aware that SLX 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):

      RSX long (400 shares from June 13 entry) – bought 55.55, stop 54.22, target new high (will trail stop), unrealized points = + 0.78, unrealized P/L = + $312

      SLV long (150 shares from June 16 entry) – bought 170.72, stop 166.30, no specific target (will trail stop), unrealized points = + 1.17, unrealized P/L = + $176

      IYT short (200 shares from June 17 entry) – sold short 91.81, stop 94.38, target 86.18, unrealized points = (0.04), unrealized P/L = ($8)

    Closed positions (since last report):

      (none)

    Current equity exposure ($100,000 max. buying power):

      $66,685

    Notes:

    • RSX is showing great relative strength, as it moved higher over the past two days while the U.S. markets sold off.
    • We expect SLV to break out above its three-month downtrend line within the next day or two. If it doesn’t, we don’t plan to hang around long.
    • SLX has not yet triggered, but remains on our watchlist going into today.

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Edited by Deron Wagner,
MTG Founder and
Head Trader

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