After drifting lower throughout the day, a closing rally enabled stocks to finish with mixed results last Friday, but the major indices still suffered their fourth straight week of losses. For the day, both the Dow Jones Industrial Average and small-cap Russell 2000 indices gained 0.5%, as the S&P 500 edged 0.1% higher. At the session low, the Nasdaq Composite was off by more than 2%, but the index trimmed its loss to just 0.4%. The S&P Midcap 400 fell 0.7%. Thanks to a bounce in the last thirty minutes of trading, the main stock market indexes closed near the middle of their intraday ranges.
Total volume in the NYSE eased 5%, while volume in the Nasdaq ticked 7% higher. Since the S&P 500 closed with a gain and the Nasdaq settled with a loss, it would have been bullish if NYSE volume had increased and Nasdaq volume had declined. Such a pattern would have favored the bulls, but the Nasdaq registered a bearish “distribution day” instead. Nevertheless, market internals in the Nasdaq were not too bad; declining volume exceeded advancing volume by less than 2 to 1. The NYSE adv/dec volume ratio finished negative, but only marginally.
There are obviously very few opportunities on the long side of the market right now, but several of the energy commodity ETFs may be in play this week. For starters, take a look at the daily chart of the Crude Oil continuous futures contract (@QM):
Since peaking approximately eight months ago, crude oil has been in a steady downtrend. However, its daily chart is indicating a potential reversal of its primary trend. Most notably, it has moved above its 50-day MA for the first time since last July, and has not done so in a parabolic way (which would be more likely to fail). Rather, it rallied off its low to form a “higher high” in late February, pulled back to form a “higher low” on March 2 and 3, and is now breaking out to form its second “higher high.” As long as the March 3 low is not violated, a new intermediate-term uptrend may be under way.
To take advantage of the developing trend reversal in crude, ETFs to consider are: U.S. Oil Fund (USO), iPath Goldman Sachs Crude (OIL), PowerShares Crude Oil Long (OLO), and PowerShares Crude Oil Double Long (DXO). As one might expect, all four ETFs have essentially the same chart pattern. However, DXO is showing a slight bit of relative strength to the others. Just remember that leveraged ETFs like DXO may not track exactly the same movements as the underlying index. This is due to the use in the daily rebalancing of the derivatives used to achieve the leveraged moves. Again, our view is that leveraged ETFs are fine for short-term trading, but they often underperform in the long-term.
Perhaps even better than the crude oil ETFs is the U.S. Gasoline Fund (UGA). Its daily chart is shown below:
Unlike the crude oil ETFs, UGA has been consolidating above its 50-day moving average for the past two months. In mid-February, UGA had a “shakeout” by dipping below its 50-day moving average for several days, but it quickly rallied back above it. Since then, it has been consolidating in a tight range, above its 20-day exponential moving average. We’re already long UGA from our March 4 entry, when UGA rallied above the upper channel of its four-day “bull flag” pattern. So far, UGA hasn’t done much, but its bullish consolidation will be confirmed on a breakout above last week’s high. If you’re not already long, UGA could now be bought above the $24.00 area. By the way, be sure not to confuse UGA with UNG, which tracks the price of Natural Gas. While the chart of UGA is poised for further upside, UNG is still trading at its low.
Last week, we dipped a toe in the long side of the market with a small buy entry into PowerShares Nasdaq 100 (QQQQ). Upon noticing the formation of bullish “hammer” patterns on the charts of approximately 70 individual stocks on March 3, we liked the reward-risk ratio of playing a quick, countertrend bounce in the Nasdaq 100, especially because the index was still holding above its November 2008 low. QQQQ indeed followed through to the upside the following day, but failed to hold support of its March 3 low last Friday. As such, we simply closed the position for a loss that was only a little more than half the dollar amount of our average loss. Even though the trade didn’t work out, it was our only buying attempt that was correlated to the market. Our other positions, Silver (SLV), Gold (GLD), and Gasoline (UGA), all bear no direct correlation to the direction of the broad stock market, so no harm done. Still, to prevent getting sucked into a fakeout one-day bounce again, we now plan to at least wait for the formation of a “higher low” and subsequent “higher high” before attempting to buy any broad-based ETFs.
Other than cash itself (which is certainly not a bad idea), your best bet for parking cash right now now may be select commodity ETFs (precious metals, crude). The inversely correlated “short ETFs” will also work, as long as the downtrend persists, but those are not to be undertaken if you don’t keep on top of your positions, nor should they be taken with a long-term view, due to declining correlation with increased holding period.
There are no new pre-market setups today. Although the crude oil ETFs may be buyable, we already have enough exposure to that sector with our existing position in UGA. Still, advanced traders may wish to consider a “self-serve” trade in the sector.
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):
- QQQQ stopped out last Friday morning, but our initial risk was limited to just $400.
- DGP technically moved above the hourly downtrend line that would have indicated adding the remaining shares to our position, but we made a judgment call to play it conservatively by giving it another day of price confirmation first. As such, we continue to hold just a half position of DGP. If we add shares to DGP today, we’ll send an Intraday Trade Alert with details.
- 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.
- For those of you whose ISPs occasionally deliver your e-mail with a delay, make sure you’re signed up to receive our free text message alerts sent to your mobile phone. This provides a great way to have redundancy on all Intraday Trade Alerts. Send your request to [email protected] if not already set up for this value-added feature we provide to subscribers.
SLV long (400 shares from March 5 entry) – bought 13.14, stop 11.39, target 16.35, unrealized points = + 0.04, unrealized P/L = + $16
DGP long (200 shares from Feb. 26 entry) – bought 20.90, stop 18.32, target new high (will trail stop), unrealized points = (0.17), unrealized P/L = ($34)
UGA long (175 shares from March 4 entry) – bought 23.41, stop 20.49, target 31.30, unrealized points = (0.50), unrealized P/L = ($87)
Closed positions (since last report):
QQQQ long (600 shares from March 3 entry) – bought 27.00, sold 26.29, points = (0.71), net P/L = ($438)
Current equity exposure ($100,000 max. buying power):
Edited by Deron Wagner,
MTG Founder and