The Wagner Daily


Stocks wrapped up an indecisive week on a positive note last Friday, as the major indices logged substantial gains. After gapping higher on the open, the broad market initially trended north, but stocks reversed course after the first hour of trading. It looked a bit shaky when the main stock market indexes fell to their morning lows by mid-day, but the bulls returned in the afternoon. Blue chips led the way this time, sending the Dow Jones Industrial Average to a 1.7% gain. The Nasdaq Composite climbed 1.4% and the S&P 500 advanced 1.1%. The small-cap Russell 2000 and S&P Midcap 400 indices rallied 1.7% and 0.9% respectively. All the major indices closed near their intraday highs, but slightly lower for the week.

One problem with last Friday’s gains is they were not driven by institutional accumulation. Total volume in the NYSE was 5% lighter than the previous day’s level, while volume in the Nasdaq receded 13%. This tell us mutual funds, hedge funds, and other institutions were reluctant to participate in the buying. Furthermore, volume in both exchanges limped in to its lowest weekly levels since the last week of December 2007. The week between Christmas and New Year’s Day is typically the slowest of the year. Last week wasn’t much better, and trading is likely to remain depressed until after the September 1 Labor Day holiday.

In the August 22 issue of The Wagner Daily, we suggested the healthcare sector was finished with its short-term correction, and that the various ETFs were poised to resume their uptrends. As expected, the healthcare ETFs indeed rallied that day, and are positioned to retain their leadership in the coming week. Within the broad healthcare arena, medical device manufacturers have been showing the most relative strength. The sole ETF that tracks that sub-sector of healthcare is iShares U.S. Medical Devices (IHI). While other healthcare ETFs “undercut” support of their 20-day exponential moving averages (EMAs) last week, IHI pulled back to its 20-day EMA, then bounced perfectly off of it. IHI also finished the week just a few cents shy of its all-time closing high of $63.00; last Friday’s intraday high was $62.94. The daily chart of IHI, which should break out to a new high in the coming day
s, is shown below:

Though we do not have a position in IHI, we are still long the iShares U.S. Healthcare Sector Index (IYH), which bounced off major support of both 20 and 200-day moving averages last Friday. Our other position in the sector, iShares Nasdaq Biotechnology (IBB), has become a bit of a laggard. Nevertheless, it is still holding support of its “swing low” from August 8, and closed the week right at its 20-day EMA. The high volatility of biotech stocks means greater profit potential for IBB, but it also means the swings in both directions may be greater than those of ETFs comprised of large cap, slower moving pharmaceutical stocks.

A different sector ETF presenting a buying opportunity with its recent pullback is PowerShares Water Resources (PHO). It recently retraced to test support of its 20-day EMA, then finished last week just above that key level of near-term support. Opposite of the biotech ETFs, PHO is a slow mover with low-volatility. The PHO pullback is shown on the daily chart below:

As we enter one of the traditionally slowest weeks of the year, the main stock market indexes continue to exhibit mixed signals. The Nasdaq Composite bounced off support of its intermediate-term uptrend line last week, but now must contend with resistance of its 200-day MA. It’s positive that the S&P 500 and Dow Jones Industrial Average both reclaimed their 20 and 50-day moving averages, but a lot of overhead supply remains from earlier in the month. With the major indices essentially in “no man’s land,” expect continued chop and whippy price action. Unfortunately, the anticipated indecision may be compounded by the fact that turnover will likely remain well below average levels until the Labor Day holiday has passed.

We probably won’t see the real direction of the market’s next move until traders and investors begin returning to their desks in the beginning of next month. Until then, it makes sense to take it easy with regard to entering new positions. Realize that the best traders are typically out of the market more than they’re in the market, meaning they carefully pick their opportunities to strike, while laying low the rest of the time. This prevents them from churning their accounts and giving back profits during the more challenging periods. The coming week is probably one of those times to lay low. Simply setting stops on existing positions and taking a one-week break from trading is certainly not a bad idea. Rather than trading through this slow period, consider using the extra time to thoroughly scan the market for new opportunities in September. Then, you too will be fresh and ready to strike when the moment is right!

Today’s Watchlist:

We will probably avoid entering any new ETF positions ahead of the Labor Day holiday. As explained above, this week is traditionally marked by low-volume that exacerbates choppy price action in the broad market. We’re already positioned in the strongest industry sector (healthcare), and still have a short position in the Dow as a hedge. Despite a few recent stop-outs, we are still on track for a profitable month in a challenging market environment. As always, we will promptly send an Intraday Trade Alert if/when we enter anything new. The two solar ETFs, KWT and TAN, are still on our watchlist for potential entry on a pullback or consolidation.

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. Please review the Wagner Daily Subscriber Guide for important, automatic rules on trigger and stop prices.

    Open positions (coming into today):

      IYH long (350 shares total – bought 250 on Aug. 5, added 100 on Aug. 14) –

      bought 66.86 (avg.), stop 65.57, target 71.12, unrealized points = + 0.79, unrealized P/L = + $277

      IBB long (200 shares from August 21 re-entry) – bought 86.18, stop 84.89, target new high (will trail stop), unrealized points = + 0.99, unrealized P/L = + $198

      DXD long (250 shares from August 18) – bought 60.60, stop 59.77, target 66.40, unrealized points = (0.30), unrealized P/L = ($75)

    Closed positions (since last report):


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



    • DXD nearly hit our stop last Friday, but recall that we raised the stop from the original price. Shortly after DXD showed an unrealized gain, we raised the stop to nearly the breakeven level because DXD was primarily entered as a hedge, like an insurance policy, against our long positions. As such, we didn’t want the full capital risk on it. Therefore, it’s no big deal if DXD stops out for a small loss today. Furthermore, it would likely mean our long positions are going higher, just as they did last Friday.

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Edited by Deron Wagner,
MTG Founder and
Head Trader