The major indices followed through on Tuesday’s strength yesterday morning, then pulled back at mid-day, but the bulls resumed control late in the day. Stocks scored another session of solid gains, as the S&P and Dow played “catch up” to recent relative strength in the Nasdaq. The S&P 500 and Dow Jones Industrial Average advanced 1.7% and 1.6% respectively, while the Nasdaq Composite took a breather, gaining “only” 0.4%. The small-cap Russell 2000 also took a rest from its bullish divergence, but still gained 0.6%. The S&P Midcap 400 motored 1.5% higher. The S&P 500, Dow Jones Industrial Average, and S&P Midcap 400 closed at their best levels of the day, while the Nasdaq Composite and Russell 2000 finished in the upper third of their intraday ranges.
Confirming the bullishness of the S&P and Dow was the fact that turnover rose 8% in the NYSE. That marked the fourth day of higher volume gains in the S&P and Dow within the past seven sessions. Given that no bouts of higher volume selling (“distribution”) countered the four days of institutional buying, it’s safe to say trading has been very healthy “under the hood.” Total volume in the Nasdaq eased 2% yesterday, but that’s not a big deal considering the leadership the Nasdaq has shown lately. Advancing volume in the NYSE exceeded declining volume by a respectable margin of 5 to 2. The adv/dec volume ratio in the Nasdaq was positive by 3 to 2.
With flat action in the U.S. dollar, several commodity-related ETFs finally bounced sharply yesterday. Oil, Coal, Natural Gas, and Agriculture all registered solid gains. The SPDR Gold Trust (GLD) gapped down below its 50-day MA yesterday, but finished at its intraday high. Of all the commodity ETFs, Market Vectors Coal (KOL) held up the best during the recent distribution in the commodities. As such, it makes sense that KOL was the largest advancer of the group yesterday. On a technical level, KOL also broke out above resistance of its intermediate-term downtrend line, as well as its 20-day exponential moving average:
If, with an emphasis on the word “if,” commodities continue to recover further, KOL has the best chance for moving back towards its prior highs. Nevertheless, with resistance of its 50-day MA just overhead, there is still a lot of overhead supply the ETF must contend with before gaining much headway.
Yesterday, we explained our rationale for buying Claymore Global Solar Energy (TAN) on Tuesday. Specifically, we liked its “double bottom” formation, which was followed by a breakout above its intermediate-term downtrend line. It gained another 1.2% yesterday, but the real action occurred in the after-hours market. After the close, solar energy leader First Solar (FSLR) reported another blow-out quarter, causing its stock to cruise 7% higher in after-hours trading. Not surprisingly, other stocks in the sector moved higher in sympathy. Correspondingly, TAN was last seen trading above the $25 level, nearly 5% above its official closing price. Since bullish momentum should keep this sector in play, at least in the short-term, and possibly the intermediate-term, we think TAN can be bought on any pullback.
Don’t forget about the strongest sector in the market right now, the biotechs. Yesterday, S&P Biotech SPDR (XBI) traded a few cents above the high of its recent consolidation on the open, but quickly pulled back into the range. Still, XBI successfully held support of its 10-day MA on the pullback. We expect a breakout above the high of its seven-day range within the next several days. A convincing rally above yesterday’s high would trigger our buy entry into XBI, which is already consolidating at its all-time high. The $66.50 area would be a logical buy trigger.
As for the broad market, all the main stock market indexes are nearing resistance of their July 23 highs. On July 28 (this past Monday), all the major indices formed definitive “swing lows,” which corresponded to the first “higher lows” since stocks bottomed in mid-July. If the major indices manage to clear resistance of their July highs, they will form new “swing highs” that correlate to their second “higher highs.” This would give us increasing confidence on the long side of the market, and would put the broad-based indexes on their way towards forming new intermediate-term, not only short-term, uptrends. We suggest monitoring price action of the major indices, perhaps even setting price alerts on your trading software, as they test their July highs; it would be prudent to sell any long positions into strength if stocks falter substantially on the test of their recent highs. Resistance of the July highs are at the following levels: S&P 500 – 1,291, Dow Jones Industrials – 11,698, Nasdaq Composite – 2,350.
S&P Biotech SPDR (XBI)
Shares = 150
Trigger = 66.51 (just above the high of the consolidation)
Stop = 63.65 (below the low of the consolidation, plus some “wiggle room”)
Target = new high (will trail stop)
Dividend Date = September 2008
Notes = See commentary above for explanation of the setup. Note that our share size is a little lighter than it normally would be ($450 risk instead of $600 – $700 risk). This is only because our $50,000 model ETF portfolio is near the maximum buying power (including margin), not because we lack confidence in the trade.
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):
- Yesterday morning’s shakeout in natural gas caused us to stop out of UNG. However, when stocks and ETFs are consolidating in a range, it’s not unusual for them to “undercut” the low of the range, known as a “stop hunt,” before reversing much higher. When we spot such a “shakeout,” we’re not afraid to re-enter the position, just as long as our original thoughts were subsequently confirmed. As such, we sent an Intraday Trade Alert, informing of our re-entry into UNG. However, note that we got back in with slightly reduced share size, in order to reduce risk. Again, we’re only trading momentum of a quick, counter-trend bounce in UNG. We’re not expecting much more than a rapid test of the 200-day MA, at which point we plan to sell into strength.
- Since UWM is now showing a gain that is nearly equal to our original risk, we have raised the stop to breakeven. We’ll continue to trail this stop higher, as well as stops of other ETFs, when it sets a new “swing high.”
UWM long (400 shares from July 29) – bought 48.19, stop 48.19, target 53.70, unrealized points = + 2.58, unrealized P/L = + $1,032
EWH long (600 shares from July 22) – bought 16.87, stop 15.89, target 19.30, unrealized points = + 0.30, unrealized P/L = + $180
TAN long (500 shares from July 29) – bought 23.65, stop 22.23, target 26.80, unrealized points = + 0.34, unrealized P/L = + $170
UNG long (300 shares from July 30 re-entry) – bought 42.88, stop 41.09, target 46.40, unrealized points = + 0.51, unrealized P/L = + $153
UUP long (1,300 shares from July 29) – bought 22.69, stop 22.23, target 23.88, unrealized points = + 0.03, unrealized P/L = + $39
Closed positions (since last report):
UNG long (400 shares from July 29) – bought 42.85, sold 41.30, points = (1.55), net P/L = ($628)
Current equity exposure ($100,000 max. buying power):
Edited by Deron Wagner,
MTG Founder and