Commentary:
Continued high volatility kept traders on their toes yesterday, as the major indices raced back to recover all of Monday’s sharp losses, and then some. Bullish resilience helped the Nasdaq Composite to gain 2.5%, the Dow Jones Industrial Average 2.4%, and the S&P 500 2.3%. Small cap stocks maintained their relative strength, enabling the Russell 2000 to zoom 2.7% higher. The S&P Midcap 400 advanced 2.1%. Opposite of the previous day, each of the main stock market indexes closed at its intraday high.
Turnover swelled yesterday, allowing the stock market to maintain the positive price to volume relationship it has settled into in recent weeks. Total volume in the NYSE rose 16% above the previous day’s level, while volume in the Nasdaq increased by 18%. The large gains on higher volume enabled both the S&P 500 and Nasdaq Composite to score another “accumulation day,” the third such day of institutional buying within the past week. While it’s still too early to determine whether or not we’ve seen the ultimate bottom of the current bear market, the broad market’s recent price to volume relationship has clearly been positive. As such, we have no choice but to have a bullish bias on the intermediate-term. Yesterday’s accumulation also helps tip the scales to the bullish side for the short-term as well.
In yesterday’s commentary, we illustrated how the small-cap Russell 2000 had pulled back to support of both its 10 and 20-day moving averages. It was therefore not surprising that the bounce off key support enabled the Russell 2000, with textbook precision, to lead yesterday’s broad-based rally. The Russell has showed the most relative strength of the main stock market indexes since the mid-July lows, and it once again outperformed the percentage gains of the rest of the major indices in yesterday’s session. Looking at the daily chart below, notice how the Russell has moved back above its 50-day MA. It is the only broad-based stock market index that has done so:
As per our pre-market plan, we bought the Ultra Russell 2000 ProShares (UWM) just a few minutes after yesterday’s open, when UWM moved back above its 20-period exponential moving average on the 15-minute chart. Because the pullback already put UWM at such a great area of support, just like the underlying index itself, we didn’t require a lot of confirmation in order to initiate a new long entry yesterday. UWM cruised much higher after our buy entry, and is already showing an unrealized gain of 2 points. We now expect the Russell 2000 (and UWM) to rally above its July high in the short-term. When it does, we’ll assess price action and determine whether to sell into strength, or let the winner ride and simply trail a protective stop.
Because of the market’s resilience to recover all of the previous day’s losses, and on higher volume, yesterday was a busy day. Solar stocks have started to come alive again, prompting us to also buy Claymore Global Solar Energy (TAN) yesterday. Leading stocks within the solar energy sector have started breaking out above recent bases of consolidation, which caused TAN to break out above its intermediate-term downtrend line on the daily chart. This occurred after TAN also formed a “double bottom” area of support. The daily chart of TAN is shown below:
In the July 28 issue of The Wagner Daily, we discussed the recent strength of the U.S. dollar, and specifically its relation to the price of commodity ETFs. We suggested the CurrencyShares Euro Trust (FXE) was about to break below major support of its 50-day MA. We pointed out that such a break of major support in FXE would cause PowerShares U.S. Dollar Index (UUP) to conversely break out above its recent consolidation. That’s exactly what happened yesterday, which triggered our long entry into UUP. The UUP breakout is shown on the chart below:
Finally, after recently netting a large gain on the Biotech HOLDR (BBH), we are now monitoring several of the biotech ETFs for the next ideal entry point to jump back into the sector. We like the pattern in S&P Biotech SPDR (XBI) the best. Presently, the ETF is in a tight, sideways range, holding above its 10-day MA. XBI is also trading at an all-time high, meaning there is a complete lack of overhead supply. We intend to buy XBI on a breakout above its recent consolidation, or a pullback to its 20-day EMA (presently at 62.83), whichever occurs first. The consolidation of XBI is shown on the daily chart below:
Despite the high volatility of the past several days, our overall biases remain the same, albeit slightly more bullish now. The long-term trends remain firmly “down.” The intermediate-term trends favor the long side, as we still don’t expect a test of the July lows yet. The short-term view still gives us mixed signals, as seen on the daily charts. However, if long anything, small caps are where it’s at. The small-cap market segment is clearly leading the way higher. It should continue to do so as the major indices attempt to rally back to test their July highs.
Today’s Watchlist:
We are now in five positions, so our portfolio is pretty active. The only remaining ETF we’re stalking for potential entry is XBI, but we’ll monitor intraday price action, rather than listing it as a setup in the pre-market. As always, we’ll promptly send an Intraday Trade Alert if/when we buy XBI.
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:
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Open positions (coming into today):
- Yesterday was a busier than usual day. Per the pre-market setups in yesterday’s Wagner Daily, both UWM and UUP triggered for long entry. Per Intraday Trade Alerts, we bought both TAN and UNG.
- No changes to existing stops at this time.
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UWM long (400 shares from July 29) – bought 48.19, stop 46.48, target 53.70, unrealized points = + 2.02, unrealized P/L = + $808
EWH long (600 shares from July 22) – bought 16.87, stop 15.89, target 19.30, unrealized points = + 0.11, unrealized P/L = + $66
UUP long (1,300 shares from July 29) – bought 22.69, stop 22.23, target 23.88, unrealized points = + 0.05, unrealized P/L = + $65
TAN long (500 shares from July 29) – bought 23.65, stop 22.23, target 26.80, unrealized points = + 0.05, unrealized P/L = + $25
UNG long (400 shares from July 29) – bought 42.85, stop 41.52, target 53.70, unrealized points = (0.32), unrealized P/L = ($128)
Closed positions (since last report):
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(none)
Current equity exposure ($100,000 max. buying power):
- $88,696
Notes:
Edited by Deron Wagner,
MTG Founder and
Head Trader