Commentary:

After opening lower on the heels of weaker than expected economic data yesterday morning, stocks quickly recovered in the morning session, but bullish enthusiasm faded as the day progressed. By day’s end, the major indices had faded back down to close at or near their intraday lows. The S&P 500 lost 1.3% and the Dow Jones Industrial Average fell 1.8%. The Nasdaq Composite resumed its trend of relative strength, limiting the loss of the tech-heavy index to just 0.2%. The small-cap Russell 2000 and S&P Midcap 400 indices slipped 0.6% and 1.4% respectively. For the month of July, the S&P 500 declined 1.0%. Considering the benchmark index was trading 6.5% lower at mid-month, its 1% drop was not too bad. The Dow Jones Industrials fared better, ekeing out a monthly gain of 0.2%. The Nasdaq Composite managed a respectable 1.4% advance last month.

In keeping with the positive price to volume relationship the market has been exhibiting in recent weeks, total volume in the NYSE declined 7% below the previous day’s level. Down days within the course of a fledgling rally are inevitable, but lower turnover on those down days indicates institutions are holding fast during the pullbacks. Total volume in the Nasdaq was on par with the previous day’s level. Market internals were negative, but not by an overly wide margin. Advancing volume in the NYSE exceeded declining volume by a spread of just 2 to 1. The Nasdaq adv/dec volume ratio was negative by 3 to 2.

The most notable sector action yesterday was the strong performance of the AMEX Biotechnology Index ($BTK), which zoomed 4.1% higher. Most industries closed lower, and none of the major sectors, outside of the $BTK, gained more than 0.5% yesterday. Such a clear example of relative strength means our adamant analysis of bullish divergence in the biotechs in recent weeks was not without good cause. Moving higher alongside of the $BTK index, all the biotech ETFs advanced to fresh multi-year or historical highs. S&P Biotech SPDR (XBI), which we’ve been discussing over the past week, gapped up to break out firmly above the high of its recent consolidation. Its move to a new all-time high is shown on the daily chart of XBI below:

Closing near its intraday high, XBI exhibited relative strength throughout the day. Volume also spiked to more than three times the average daily level, suggesting institutions were behind the accumulation of XBI shares. Not only was yesterday’s trading higher than average, but notice how turnover has steadily been increasing in recent weeks, ever since XBI began trending higher in early July. This is the footprint of buying on the part of mutual funds, hedge funds, pension funds, and other big money players. Though we bought XBI on its mid-day pullback yesterday, the large opening gap prevented our entry from being at the most ideal price, which would have been just 10 to 20 cents above the high of the recent consolidation. Nevertheless, it’s actually positive that such bullish price action made it difficult to achieve the perfect entry price.

In the final paragraph of yesterday’s commentary, we discussed resistance of the July 23 highs that each of the major indices were approaching. Yesterday, the Nasdaq Composite was the first of the main stock market indexes to test its July 23 high, at which point the index backed off significantly. The Nasdaq’s test of its “swing high” is shown on the daily chart below:

Since the Nasdaq is showing relative strength to the S&P and Dow, it will be important for the index to break out above that 2,350 resistance level within the next week or so. We would also expect the leading small-cap Russell 2000 to do the same, which is why we’re still long Ultra Russell 2000 ProShares (UWM). The S&P 500 and Dow Jones Industrials, both of which failed to even rally above Wednesday’s highs, are still well below their July 23 highs (S&P 500 – 1,291, Dow Jones Industrials – 11,698). A bit of price consolidation here would not be a bad thing, just as long as the pullbacks of the major indices don’t exceed support of their July 28 lows.

As we are already well-positioned with a diverse mix of ETFs, and the major indices are just digesting their recent gains, there’s not much more we’re looking at going into today’s session. Lately, traders have shown a reluctance to heavily carry long positions into the weekend; we’ll be watching to see if the same trend occurs into this week’s close. Remember to trade what you see, not what you think!

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Today’s Watchlist:

Our model ETF portfolio is now at its maximum buying power. Rather than looking for new plays, we’ll focus on carefully managing our existing ETF positions with the right balance of maximum profitability and the least amount of risk.

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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):
UWM long (400 shares from July 29) – bought 48.19, stop 48.19, target 53.70, unrealized points = + 2.12, unrealized P/L = + $848

XBI long (150 shares from July 31) – bought 68.72, stop 65.35, target new high (will trail stop), unrealized points = + 0.47, unrealized P/L = + $71

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

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 (300 shares from July 30 re-entry) – bought 42.88, stop 41.09, target 46.40, unrealized points = (0.28), unrealized P/L = ($84)

EWH long (600 shares from July 22) – bought 16.87, stop 15.89, target 19.30, unrealized points = (0.17), unrealized P/L = ($102)

Closed positions (since last report):

(none)

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

$94,639

Notes:

• After observing the opening gap in XBI, we sent an Intraday Trade Alert with details of our decent entry on a mid-day pullback. If you failed to use the MTG Opening Gap Rules and happened to buy XBI on the open, even better for you! However, our “official” trade entry will be based on our mid-day pullback entry.
• No changes to existing stops or positions.

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Edited by Deron Wagner,
MTG Founder and
Head Trader