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The Wagner Daily


Commentary:

Traders “enjoyed” another wild day of whippy trading yesterday that caused the main stock market indexes to finish with mixed results. After opening lower, the main stock market indexes continued south throughout the first thirty minutes of trading, but the bulls arrived on the scene shortly thereafter. Stocks trended higher throughout the rest of the morning and into the afternoon, but upside momentum dried up in the final hour, causing the market to surrender much of its gains in the final hour of trading. The Nasdaq Composite, down 2.0% at its morning low and up 1.7% at its afternoon high, eventually settled with a modest gain of 0.1%. The S&P 500 followed a similar intraday pattern, but finished with a loss of 1.1%. The Dow Jones Industrial Average fell 0.8%. The small-cap Russell 2000 and S&P Midcap 400 indices slipped 0.3% and 0.9% respectively. All the major indices closed near the middle of their intraday ranges, indicating another tug-of-war between the bulls and bears.

Volume surged higher across the board. Total volume in the NYSE soared 31% above the previous day’s level, while volume in the Nasdaq similarly increased 37%. In both exchanges, volume was well above 50-day average levels. Trading in the Nasdaq registered its highest level in nearly four months. Because the Nasdaq closed slightly positive, the sharply higher turnover was bullish. Technically, the S&P 500 marked a “distribution day” by closing lower on increasing volume, but the intraday price action was not clearly representative of institutional selling. It was more akin to a draw. Market internals were negative, but not by a wide margin. Declining volume in the NYSE exceeded advancing volume by a ratio of just over 2 to 1. The Nasdaq adv/dec volume ratio was only fractionally negative.

Over the past month, we’ve been monitoring the price action of the inversely correlated UltraShort Financials ProShares (SKF) on a daily basis. As financial stocks have gotten hammered, SKF has steadily climbed higher. Because SKF is incredibly volatile, we made a judgment call to avoid trading in SKF in this newsletter, but its daily price action has served as an inversely correlated proxy to the direction of financial stocks. Yesterday, SKF became parabolic, and volume surged to its all-time highest levels. This combination of events may be representative of an “exhaustion” move that usually provides a warning signal to astute traders that a significant top is near. This is illustrated on the daily chart of SKF below:

If SKF is truly forming a short to intermediate-term top, it means the financial stocks may finally be bottoming. While this does not mean we should get excited and start buying the financial sector, it does mean that a potential bounce in financials could lead to a significant bounce in the broad market in the coming days.

Both the bulls and bears were on their toes yesterday, as stocks whipsawed violently in both directions. In the morning, our long position in Ultra Russell 2000 ProShares (UWM) hit its protective stop, but we calmly re-entered the position when the market reversed later in the afternoon. The exhaustion pattern in SKF, which fell a whopping 13% from its morning peak to mid-day low, gave us additional confidence that the market may be forming a near-term bottom. After re-entering UWM about 80 cents higher than where we stopped out, it went on to rally more than 4% higher throughout the afternoon, but the late-day pullback caused UWM to close just above our re-entry price.

One of the most psychologically difficult things for many traders to do, including ourselves, is to re-enter a position they just stopped out of, especially if doing so at a higher price. Yet, the ability to do so often leads to some of the most profitable trades. Despite the realized loss from our July 10 entry into UWM, we were not afraid to re-enter it yesterday, even at a higher price. After all the “weak hands” are shaken out of a position with relative strength, the stock or ETF will often rip in the originally intended direction. In this case, yesterday’s “undercut” of the July 7 low was actually bullish because all the wavering traders and investors who were nervous about holding the position are now gone. This decreases the amount of overhead supply UWM must overcome in order to move higher. It was indeed an extremely volatile day, but our disciplined, controlled approach to trade management enabled us to largely stay out of harm’s way while stocks were falling apart in the morning, but still allowed for potential upside profits when the market reversed.

The most exciting thing about yesterday’s session was the stellar performance of our position in the Biotech HOLDR (BBH), which zoomed nearly 4% higher, on four times its average daily volume. We’ve been ranting about the relative strength of the biotech sector for weeks, and that relative strength finally led to large gains in yesterday’s session. BBH now showing a gain of 4.6% (8 points) since our July 2 entry. More importantly, it is now breaking out above resistance of a multi-year downtrend line that began with the high of November 2005. This is shown on the monthly chart below:

With minimal overhead supply above the $180 level, we now expect BBH to rally back to test its all-time high in the near future. If long anything in the stock market right now, biotechs are the place to be (aside from gold and silver). If you’re a new subscriber who missed our initial entry into BBH two weeks ago, a touch of the 20-period exponential moving average on the hourly chart would present a low-risk entry point. Such a touch of the 20-EMA could occur through either a correction by price (pullback) or correction by time (sideways consolidation).

Over the past two weeks, we’ve been bearish on three sectors: steel, agriculture/fertilizers, and oil/oil service. When the stock market rallied yesterday, prior to the late-day pullback, both steel and agriculture/fertilizers mover higher as well. Oil, however, did not. As such, oil-related ETFs such as Oil Service HOLDR (OIH) or S&P Energy SPDR (XLE) may still be low-risk short sales, even if the broad market moves higher in the near-term. Perhaps the best way to view these oil ETFs is as hedges for long positions such as BBH. Going into today, the inversely correlated UltraShort Oil and Gas ProShares (DUG) is perfectly positioned to break out above a band of consolidation on its hourly chart. Don’t forget that the ProShares family of UltraShort ETFs, which includes DUG, offers a great way for investors to profit from downward movements in the stock market, even in non-marginable cash accounts such as IRAs.


Today’s Watchlist:


Market Vectors Russia (RSX)
Long

Shares = 300
Trigger = 51.17 (above yesterday’s high and hourly downtrend line)
Stop = 49.24 (below last week’s low)
Target = 58.45 (test of 52-week high)
Dividend Date = n/a

Notes = This setup did not yet trigger, but remains on our watchlist going into today. See commentary in the July 14 issue of The Wagner Daily 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):

      BBH long (200 shares total; 100 from July 2, 100 from July 3) – bought 172.18 (avg.), stop 174.30, no target (will trail stop), unrealized points = + 7.92, unrealized P/L = + $1,584

      GLD long (200 shares from July 10) – bought 92.58, stop 91.58, target new high (will trail stop), unrealized points = + 3.59, unrealized P/L = + $718

      UWM long (250 shares from July 15 re-entry) – bought 43.02, stop 41.63, no target (will trail stop), unrealized points = + 0.08, unrealized P/L = + $20

    Closed positions (since last report):

      DUG long (300 shares from July 15) – bought 30.85, sold 31.20, points = + 0.35, net P/L = + $99

      UWM long (250 shares from July 10) – bought 45.15, sold 42.23, points = (2.92), net P/L = ($735)

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

      $66,029

    Notes:

    • Yesterday was a crazy day that required the sending of numerous Intraday Trade Alerts with action required. We bought and sold DUG for a small gain (scratch), and also stopped out of and re-entered UWM.
    • Stops have been raised on both BBH and GLD. For now, the stops are still loose, but we will continue trailing the stops higher as both positions begin to form a band of consolidation. Since both BBH and GLD are intermediate-term trades, our stops must be loose enough to sit through a small pullback in order to allow for the benefit of eventually realizing a very large gain.
    • RSX did not yet trigger, but we’re keeping it on our watchlist. Notice the new trigger price on the setup.

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Edited by Deron Wagner,
MTG Founder and
Head Trader

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