Commentary:
Stocks concluded their sixth straight week of losses with a session of volatile and whippy trading that left most of the major indices substantially lower last Friday. After trending south throughout the morning, momentum reversed higher in the afternoon, briefly pushing the main stock market indexes into positive territory, but the bears sold into strength in the final hour of trading. The Nasdaq Composite fell 0.8%, as both the S&P 500 and Dow Jones Industrial Average slid 1.1%. Although the S&P Midcap 400 Index lost 0.4%, the small-cap Russell 2000 bucked the bearishness by gaining 0.7%. This was advantageous to our position in Ultra Russell 2000 ProShares (UWM), which we bought the previous day. With the exception of the Russell, all the major indices closed in the middle of their intraday ranges.
Volume ticked higher across the board, causing both the S&P 500 and Nasdaq Composite to register a bearish “distribution day.” Total volume in the NYSE rose 14%, while volume in the Nasdaq increased 4% above the previous day’s level. The higher volume selling negated the preceding day’s session of higher volume gains that hinted at institutional selling. However, consider that stocks briefly traded into positive territory before selling off into the final hour last Friday. As such, the higher volume losses may not have been as negative as one might initially assume. In both the NYSE and Nasdaq, declining volume exceeded advancing volume by a margin of approximately 5 to 2.
Going into the new week, there are several bullish ETF setups we like for potential long entry. The Biotech HOLDR (BBH), which we have been long since July 2, continues to show great relative strength to the broad market. This is because institutions are now accumulating shares of BBH, as evidenced by the fact that higher than average volume accompanied last week’s rally to its highest level of the year. BBH is also poised to break out above resistance of a multi-year downtrend line on the monthly chart that began with the high of November 2005. That breakout will occur on a rally above last week’s high of $179.29. Such a move would represent a major change of fortune for the long-term direction of BBH. Other biotech ETFs such as iShares Nasdaq Biotech (IBB) and SPDR S&P Biotech (XBI) have also begun to show bullish chart patterns. Just be aware that many leading biotech stocks are scheduled to report their quarterly earnings this week, so the sector could become quite volatile.
One international ETF we like for potential long entry this week is Market Vectors Russia (RSX). Not surprisingly, RSX has moved lower alongside of the S&P 500 in recent months. However, RSX has been showing substantial relative strength to the U.S. stock market because it is still well above its 52-week lows, unlike the S&P 500 and Dow Jones Industrial Average. Based on last Friday afternoon’s serious reversal attempt in the broad domestic market, odds are good the main stock market indexes will rally in the near-term. If they do, RSX should outperform the percentage gains of the major indices. More importantly, RSX has pulled back to a major area of support that provides a low-risk entry point for purchase. This is shown on the daily chart of RSX below:
Circled in pink on the chart above, RSX is starting the week at pivotal support of both its 200-day moving average (the thick orange line) and primary uptrend line (the dashed blue line) that began in January 2008 and anchors with the low of March 2008. From here, we expect RSX to resume its long-term uptrend and eventually move back to its May 2008 high. The ideal buy point for RSX that provides the best ratio of low risk and high profit potential is a rally above last week’s high of $51.36 (the dotted black line). Regular subscribers to The Wagner Daily should note our detailed trigger, stop, and target prices for the RSX setup below.
Most of the fixed-income (bond) ETFs sold off last Friday, providing us with low-risk pullback entries in several of the bond ETFs we have been monitoring over the past week. iShares 7-10 year Treasury Bond Fund (IEF), for example, broke out on July 7, moved higher over the next several days, then retraced to finish the week at major support of its 20, 50, and 200-day moving averages. A pullback to such a convergence of key moving averages provides for a very positive reward/risk ratio on a new trade entry. Even better is that the convergence of moving averages aligns with support of the intermediate-term uptrend line off the June 2008 low. Finally, don’t forget that the fixed-income ETFs pay substantial monthly dividends that add to the profit of any capital gains. The pullback to support is shown on the daily chart of IEF below:
The StreetTRACKS Gold Trust (GLD), which we discussed thoroughly in our July 11 commentary, closed the week on a very positive note by firmly breaking out above a significant area of horizontal price resistance in the $93.50 to $94 area. With little overhead supply to hold it down, it shouldn’t take long before GLD rallies back to test resistance of its all-time high, around the $100 area. iShares Silver Trust (SLV) also broke out above a key area of price resistance and should soon follow suit to test its record high. Our long position in GLD, which we bought on July 10, is already showing an unrealized gain of nearly 3%, but bullish momentum should still carry it higher in the short-term.
The market has not yet given us any reason to be overly positive on the near-term direction of stocks. Nevertheless, buying an ETF or two with relative strength to the market (such as BBH) is probably a safer bet than new short entries at current levels. In the event the overall market refuses to bounce this week, we still like the following ETFs for short entry: SPDR S&P Metals and Mining (XME), Market Vectors Steel (SLX), and Market Vectors Agribusiness (MOO). Oil Service HOLDR (OIH) has been removed from our bearish watchlist, but could still make another leg lower in the near-term. But despite their current relative weakness to the broad market, it may be risky to short these ETFs until we first see a substantial counter-trend bounce in the main stock market indexes. At that point, rallies into their 20 and 50-day moving averages would provide short entries with positive reward/risk ratios.
Today’s Watchlist:
Market Vectors Russia (RSX)
Long
Shares = 300
Trigger = 51.54 (above last week’s high)
Stop = 49.24 (below last week’s low)
Target = 58.45 (test of 52-week high)
Dividend Date = n/a
Notes = See commentary above for explanation of the setup.
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):
- Thanks to a bit of luck last Friday, UWM missed our stop by just two cents before reversing to rally steadily higher into the closing bell. End-of-week price action positions UWM for further upside over the next few days.
- We have raised the stop on GLD.
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BBH long (200 shares total; 100 from July 2, 100 from July 3) – bought 172.18 (avg.), stop 171.32, target 181.80, unrealized points = + 3.70, unrealized P/L = + $740
GLD long (200 shares from July 10) – bought 92.58, stop 90.45, target new high (will trail stop), unrealized points = + 2.58, unrealized P/L = + $516
UWM long (250 from July 10) – bought 45.15, stop 42.88, no target (will trail stop), unrealized points = (0.05), unrealized P/L = ($13)
Closed positions (since last report):
-
(none)
Current equity exposure ($100,000 max. buying power):
- $65,483
Notes:
Edited by Deron Wagner,
MTG Founder and
Head Trader