Commentary:
Stocks roared back from their losses of the past several sessions yesterday, enabling the major indices to finish right at resistance of last month’s highs. After gapping higher on the open, the broad market grinded higher throughout the first half of the day, then continued to build on its gains after the 2:15 pm Fed announcement. As widely anticipated, the Federal Open Market Committee (FOMC) not only left interest rates unchanged, but also avoided hinting at future rate increases. The stock market’s knee-jerk reaction was quite positive. The Nasdaq Composite rocketed 2.8% higher, while the S&P 500 and Dow Jones Industrial Average scored identical gains of 2.9%. The small-cap Russell 2000 and S&P Midcap 400 indices climbed 2.4% and 2.1% respectively. Breaking the recent pattern of choppy and indecisive trading, it was also refreshing that stocks trended smoothly intraday for the first time since July 29. All the main stock market indexes finished at their best levels of the day.
Confirming yesterday’s massive gains was a sharp spike in volume across the board. Total volume in the NYSE swelled 13% above the previous day’s level, while volume in the Nasdaq similarly ticked 19% higher. Although the S&P 500 logged a bearish “distribution day” by declining on higher volume on August 4, it’s quite positive that stocks followed up Monday’s bout of institutional selling with a powerful round of institutional buying. It was the fifth such “accumulation day” within the past two weeks. Since the broad market formed its intermediate-term bottom in the middle of last month, there have been six “accumulation days (higher volume buying),” and just one “distribution day (higher volume selling).” Without even looking at a single chart pattern, this ratio tells us the bulls have clearly had the upper hand recently.
Ten of the twenty-five major industry sectors we monitor on a daily basis bagged impressive gains of more than three percent yesterday. However, very few of these sectors have nice daily or weekly chart patterns that would excite us to enter new positions. Most industries, including semiconductors ($SOX), are still trading below resistance of their intermediate and long-term downtrend lines. In this situation, one would have no reason to expect a lot of upside potential until the sector breaks out and starts to absorb some overhead supply. Other industries, such as banking ($BKX) and transportation ($DJT), are stuck in choppy, sideways trading ranges that we don’t want to touch.
Considering this situation, what sector ETFs should an astute trader look to buy if bullish momentum continues in the near to intermediate-term? In addition to the biotechnology ETFs, which we’ve been discussing regularly for the past several weeks, we’re now beginning to see relative strength and breakouts in the pharmaceutical and healthcare industries, both of which are “sister sectors” to biotechnology. Let’s take a look at a few ETFs in those sectors. First, check out the daily chart of iShares U.S. Healthcare Sector Index (IYH), comprised of 139 different companies in the healthcare, biotech, and medical devices sectors:
As the dashed horizontal line indicates, IYH just broke out above a key band of price resistance. The breakout also coincided with a breakout above its 200-day moving average (the orange line). Much higher than average volume over the past two days confirms the institutional buying interest. Per Intraday Trade Alert to subscribers, we bought IYH when it rallied above its 200-day MA yesterday. The S&P Healthcare SPDR (XLV) has a similar chart pattern, but did not exhibit a similar volume surge this week.
Another related ETF that looks good right now is iShares U.S. Medical Devices (IHI). This ETF broke out above a similar band of horizontal price resistance, but is already well above its 200-day MA. Furthermore, it is less than 2% below its all-time high. On the daily chart below, notice how yesterday’s volume surged to more than 4 times its average daily level on the breakout:
Even the lackluster Pharmaceutical HOLDR (PPH), comprised primarily of large-cap, old-school pharmaceutical companies, is showing signs of life. It’s still trading near multi-year lows, but is about to break out above resistance as well. We prefer IYH or IHI because their chart patterns are better and they have some more dynamic, faster-growing companies in their portfolios. High-growth companies typically lead a sector that is showing relative strength. But regardless of which ETF you prefer, it’s clearly evident that the entire healthcare arena is under institutional accumulation. If buying anything right now, strongly consider having at least a few healthcare ETFs (biotech, pharmaceutical, or medical devices) in your portfolio. In addition to our new position in IYH, we also remain positioned in the S&P Biotech SPDR (XBI). Biotech-specific ETFs, including tickers such as XBI, BBH, IBB and PBE, are the strongest of the healthcare-related ETFs.
As for the broad market, most of the major indices closed at a pivotal area of resistance. Last week, the S&P 500 and Nasdaq Composite both tested resistance of their “swing highs” that were set on July 23. They backed off immediately after doing so, resulting in the July 31 – August 4 pullback. Yesterday, however, both indexes fully recovered the preceding three days of losses to close right at last week’s highs. Since this is the second test of their “swing highs” in less than a week, we think there are pretty decent odds the major indices will break out to new intermediate-term highs within the next several days. The pivotal levels of “swing high” resistance to watch are: S&P 500 – 1,291, Nasdaq Composite – 2,353, Dow Jones Industrial Average – 11,698. If the major indices close firmly above these levels, we could see a strong burst of upside momentum in the near-term. Although the long-term trends are still pointing down, let’s take advantage of strength from the stock market’s counter-trend bounce, which is all we can call it right now, while it lasts.
Today’s Watchlist:
Our model ETF portfolio is currently at its maximum buying power of $100,000. As such, we are not stalking any new ETFs for entry today. We now have a nice mix of ETFs that should outperform the market moving forward.
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):
- Per Intraday Trade Alert, we bought a new position of IYH. Trade details listed above.
- Now that UWM is showing a gain of approximately double our original risk, we have raised the stop to lock in a gain of at least 1 point, just in case its breakout attempt fails.
- We have also raised the stop slightly in UUP.
- EWH is not impressing us with its recent price action. We’re going to just scratch the trade if it doesn’t surge higher when the major indices break out to new “swing highs.”
- A few rogue trades in the first minute of trading caused our TAN stop to inadvertently get triggered, but the trades were well outside the actual bid/ask spread. As such, we quickly got back in the trade and sent an Intraday Trade Alert informing of such. As we’ve said in the past, stops are best placed after the first 2 to 3 minutes of trading, so as to prevent rogue opening prints from falsely triggering stops. Our new trade management rules will soon be released that will state our stops don’t go live until the first few minutes of trading each day. This is necessary due to the increasing number of false opening prints in ETFs.
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UWM long (400 shares from July 29) – bought 48.19, stop 49.27, target 53.70, unrealized points = + 2.99, unrealized P/L = + $1,196
UUP long (1,300 shares from July 29) – bought 22.69, stop 22.49, target 23.88, unrealized points = + 0.28, unrealized P/L = + $364
TAN long (500 shares from August 5 re-entry) – bought 22.59, stop 22.23, target 26.30, unrealized points = + 0.31, unrealized P/L = + $155
IYH long (250 shares from August 5) – bought 66.67, stop 64.19, target 71.12, unrealized points = + 0.18, unrealized P/L = + $45
EWH long (600 shares from July 22) – bought 16.87, stop 15.89, target 19.30, unrealized points = (0.24), unrealized P/L = ($144)
XBI long (150 shares from July 31) – bought 68.72, stop 65.35, target new high (will trail stop), unrealized points = (0.96), unrealized P/L = ($144)
Closed positions (since last report):
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TAN long (500 shares from July 29) – bought 23.65, sold 22.20 (avg.), points = (1.45), net P/L = ($735)
Current equity exposure ($100,000 max. buying power):
- $98,638
Notes:
Edited by Deron Wagner,
MTG Founder and
Head Trader