Stocks got off to a scary start yesterday morning, as several of the major indices dipped below their prior closing lows from July, but an impressive bullish reversal day enabled the broad market to finish significantly higher. The S&P 500 and Nasdaq Composite started the day with matching losses of 1.7%, but the bulls bought into weakness for a change, causing the indices to rally 3% off their intraday lows to close higher by 1.4% and 1.3% respectively. The blue-chip Dow Jones Industrial Average fared best with its 1.5% gain, but small and mid-caps lagged behind. The Russell 2000 gained just 0.3%, as the S&P Midcap 400 advanced 0.5%. All the main stock market indexes closed at their best levels of the day.
Total volume in the NYSE ticked 3% higher, while volume in the Nasdaq edged 1% above the previous day’s level. Though turnover was only marginally greater, both the S&P 500 and Nasdaq Composite technically registered bullish “accumulation days.” The intraday price action that enabled the major indices to reverse early losses to substantial gains confirmed the presence of institutional buying. In both the NYSE and Nasdaq, advancing volume exceeded declining volume by a margin of 2 to 1. Considering the adv/dec volume ratios were negative by 10 to 1 early in the morning, the volume spread by the closing bell was pretty good. On September 8, when the S&P 500 closed more than 2% higher, recall the adv/dec volume ratio in the NYSE was positive by only 3 to 2.
For the first time this month, we saw some positive signs in yesterday’s market action. Although the S&P 500 and Dow Jones Industrial Average gained a greater percentage during the September 8 rally, yesterday’s buying was not primarily limited to the financial sectors. This time, the Nasdaq kept pace with the other indexes. Further, we actually saw a handful of individual stocks breaking out to new 52-week highs yesterday. This differs greatly from the September 8 rally, in which the biggest gaining stocks were merely bouncing off their lows.
After observing the complete rebound in the S&P 500, we made a judgment call to sell our position in the UltraShort Basic Materials ProShares (SMN). Though the basic materials sector continued to show relative weakness to the broad market, we didn’t want to get into a situation where we risk giving all our profits back if the market forms a short-term bottom from here. So, rather than holding out for original price target, a few points higher than the previous day’s close, we sold SMN for a gain of 8% since our September 5 entry. Upon seeing confirmation the bullish reversal was likely to hold, we sent an Intraday Trade Alert to subscribers, and initiated a new long position in iShares Nasdaq Biotech (IBB). Because the biotech and medical-related sectors were leading the market before the recent sell-off, we expect those sectors to lead the reversal higher, IF indeed the broad market attempts to form a short-term bottom here. As IBB had begun to form a base over the past week, our plan was to buy IBB when/if it rallied above the high of the preceding two days. The horizontal line on the daily chart below illustrates our entry point:
Admittedly, IBB still has a lot of overhead supply to contend with. Specifically, it must overcome its 20 and 50-day moving averages, which have converged overhead. Nevertheless, our entry point was low enough that it was justified because of such a positive positive reward/risk ratio. If IBB rallies to its 20/50-day MA convergence and acts poorly, we can quickly close the position and still realize a decent gain. But if it happens to power through that area of resistance, our low entry price will allow us to have a wider stop that affords for holding through pullbacks on the way back up. With some of the least-damaged chart patterns in the entire ETF market, the various healthcare ETFs, including IBB, BBH, and IHI, are probably one of the best places to be if indeed the stock market forms a short-term bottom from here.
Several factors make us think a short-term bottom in the broad market may form right here. First, as mentioned earlier, we finally saw positive intraday price action and leadership among a few stocks for the first time this month. Overall, yesterday’s session was much more bullish than the rally of September 8. Yesterday morning, both the S&P 500 and Nasdaq Composite also “undercut” support of their prior closing lows from July 2008, then reversed to close well above those lows. This is bullish action that points to institutional buying into weakness. Finally, the major indices formed “bullish engulfing” candlestick patterns on their daily charts. This pattern occurs when an index opens below the previous day’s low, but rebounds to close above the previous day’s high. Below, we’ve highlighted this pattern on the daily chart of the S&P 500 SPDR (SPY), a popular ETF proxy for the S&P 500 Index:
Although we think there’s a fair chance that a short-term bottom may form from here, realize we have not suddenly turned into raging bulls. Both the intermediate and long-term trends remain exceedingly bearish, and the main stock market indexes have a ton of heavy lifting to do in order to change that situation. Still, because of yesterday’s price action, we think the reward/risk ratio on the short side of the market is no longer very attractive, at least in the short-term. We are “dipping a toe in the water” with just one long position for now, but we’ll be monitoring our entire realm of ETFs for other bullish setups in the coming days. If we’re wrong, and the major indices immediately crash through yesterday’s lows, our risk is still minimal at this time.
As per the commentary above, we’ll be selectively monitoring the market for new ETF entries in the coming days. However, we first want to make sure that yesterday’s bullish reversal doesn’t immediately slip away. If/when we spot anything new, we’ll promptly send an Intraday Trade Alert with details.
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):
- Per Intraday Trade Alerts, we bought IBB, then sold SMN shortly thereafter. New trade details for IBB are listed above.
- Reminder to subscribers – Intraday Trade Alerts to your e-mail and/or mobile phone are normally only sent to indicate a CHANGE to the pre-market plan that is detailed in each morning’s Wagner Daily. We sometimes send a courtesy alert just to confirm action that was already detailed in the pre-market newsletter, but this is not always the case. If no alert is received to the contrary, one should always assume we’re honoring all stops and trigger prices listed in each morning’s Wagner Daily. But whenever CHANGES to the pre-market stops or trigger prices are necessary, alerts are sent on an AS-NEEDED basis. Just a reminder of the purpose of Intraday Trade Alerts.
IBB long (300 shares from September 11 entry) –
bought 83.65, stop 81.19, target new high (will trail stop), unrealized points = + 0.54, unrealized P/L = + $162
Closed positions (since last report):
SMN long (200 shares from September 5 entry) –
bought 41.29, sold 44.73, points = + 3.44, net P/L = + $684
Current equity exposure ($100,000 max. buying power):
Edited by Deron Wagner,
MTG Founder and