Commentary:

Resistance of last month’s “swing highs” in most of the major indices triggered a broad-based round of selling yesterday. After opening lower, stocks attempted to recover throughout the morning session, but the bears resumed control in the afternoon, causing the main stock market indexes to fall below their opening lows. The Nasdaq Composite declined 1.0%, the S&P 500 1.8%, and the Dow Jones Industrial Average 1.9%. The small-cap Russell 2000 and S&P Midcap 400 lost 1.7% and 1.5% respectively. All the major indices finished near their intraday lows.

Turnover was mixed. Total volume in the NYSE rose 7% above the previous day’s level, but volume in the Nasdaq eased 1%. The higher volume selling in the NYSE caused the S&P 500 to register a bearish “distribution day,” the second in a week. The Nasdaq narrowly avoided having the same label. Market internals were worse in the NYSE, where declining volume exceeded advancing volume by a margin of 4 to 1. The Nasdaq adv/dec volume ratio was negative by just 2 to 1.

As commodities continue to get hammered, the U.S. dollar continues to strengthen. Yesterday, the euro fell below a five-month base of support, versus the U.S. dollar. This enabled our long position in the PowerShares U.S. Dollar Index (UUP) to break out and close above its 200-day moving average for the first time in about a year. UUP also broke out above its primary downtrend line, indicating a serious change of long-term bias for the dollar. The UUP breakout above its long-term downtrend line is shown on the weekly chart below:

Yesterday’s sell-off came right as the S&P 500 and Dow Jones Industrial Average tested key resistance of their “swing highs” from July 23. When the major indices approach such obvious and pivotal areas of resistance, it’s not uncommon for stocks to “shake out the weak hands” by giving the appearance that the rally attempt is dead. However, the daily charts of the S&P and Dow show that yesterday’s sell-off was not damaging on a technical level. In fact, both indexes merely pulled back to support of their intermediate-term uptrend lines. This is shown on the daily charts of the S&P and Dow below:

On each chart above, the red horizontal lines mark resistance of the indices’ “swing highs” from last month. Notice how the 50-day moving averages (the teal lines) have descended to roughly converge with those horizontal areas of price resistance as well. The blue, upward-sloping dashed lines mark support of the intermediate-term uptrends off the July lows. Despite yesterday’s steep losses, notice how both indexes are still above support of their intermediate-term uptrend lines. Further, both the S&P and Dow closed at support of their 10-day moving averages (the purple dotted lines), and just a hair below their 20-day exponential moving averages (the beige lines).

The Nasdaq Composite is looking a little better than the S&P and Dow, as the index has already rallied to a new “swing high.” However, yesterday’s loss caused the index to fall back to its 50-day MA and breakout level. Another day of selling in the Nasdaq will cause the recent breakout to fail. Although it will be technically negative if the Nasdaq closes below yesterday’s low, the bigger issue is whether or not stocks log further “distribution days” by falling on higher volume. Below is the daily chart of the Nasdaq Composite:

One could reasonably say the S&P 500 and Dow Jones Industrial Average are stuck between a rock and a hard place. The intermediate-term uptrend lines, as well as 10 and 20-day MAs, are providing support below. But just overhead, there is horizontal price resistance that roughly converges with the 50-day MAs of the S&P and Dow. Until there is firm resolution of either a break below support, or breakout above resistance, we expect to see choppy, range-bound trading in the near-term. As such, it may be a good idea to hold off on new positions until stocks make up their mind by making a clear move above resistance or below support. Be careful to avoid overtrading in this environment, and remember to always trade what you see, not what you think!

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Today’s Watchlist:

Since two positions were closed yesterday, we have freed up some buying power in our portfolio. However, as per the commentary above, we’re not in a hurry to enter anything new until the market confirms the breakout of its short-term trading range. As always, we’ll promptly send an Intraday Trade Alert if/when we enter anything new.

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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 49.27, target 53.70, unrealized points = + 2.13, unrealized P/L = + $852

UUP long (1,300 shares from July 29) – bought 22.69, stop 22.49, target 23.88, unrealized points = + 0.47, unrealized P/L = + $611

TAN long (500 shares from August 5 re-entry) – bought 22.59, stop 22.23, target 26.30, unrealized points = + 0.32, unrealized P/L = + $160

IYH long (250 shares from August 5) – bought 66.67, stop 64.19, target 71.12, unrealized points = (0.35), unrealized P/L = ($88)

Closed positions (since last report):

EWH long (600 shares from July 22) – bought 16.87, sold 15.89, points = (0.98), net P/L = ($600)

XBI long (150 shares from July 31) – bought 68.72, sold 65.34, points = (3.38), net P/L = ($510)

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

$78,271

Notes:

• A sharp, late-day drop in the biotech sector caused XBI to break support of its recent range and hit our stop. However, the pullback is still not that substantial, and the 20-day EMA should provide support as well. If yesterday’s correction turns out to be a short-lived “shakeout,” we may jump back into XBI because biotech (and other healthcare segments) is the strongest industry sector out there.
• EWH, which has been showing relative weakness, stopped out. No plans to re-enter.

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Edited by Deron Wagner,
MTG Founder and
Head Trader