Commentary:
Continuing the trend of the past week, stocks bobbed and weaved through another choppy session before finishing with mixed results. Similar to the previous day’s action, the major indices opened lower, reversed the early losses by mid-day, then drifted back down in the afternoon. The Dow Jones Industrial Average slipped just 0.1%, while both the S&P 500 and Nasdaq Composite lost 0.3%. Small and mid-cap stocks showed relative strength, as the Russell 2000 and S&P Midcap 400 indices gained 0.7% and 0.5% respectively. Most of the main stock market indexes closed near the middle of their intraday ranges, pointing to a standoff between the bulls and bears into the close.
Overall volume levels ticked lower, again enabling the S&P and Nasdaq to avert a bearish “distribution day.” Total volume in the NYSE eased 11%. Trading in the Nasdaq declined 4% below the previous day’s level. Turnover fell below 50-day average levels in both exchanges, and was the slowest day of the past two weeks. This tells us institutions were primarily standing on the sidelines; hence the lack of direction in the markets. Declining volume in the NYSE narrowly exceeded advancing volume by a ratio of less than 3 to 2. The Nasdaq adv/dec volume ratio was negative by approximately 2 to 1.
Much of yesterday’s ETF sector action was mixed and uneventful. However, one area that saw a lot of action, albeit to the downside, was the fixed-income (bond) ETFs. The iShares 20+ year T-Bond Fund (TLT), a popular ETF proxy for long-term treasury bonds, broke down below a multi-month base of support, which correlated to a breakdown below key support of its 200-day moving average as well. This is shown on the daily chart of TLT below:
Those of you looking to take advantage of the breakdown in the long-term T-bonds may want to check out a potential buy setup in the inversely correlated UltraShort 20+ year T-bond (TBT):
As illustrated by the dashed horizontal line, TBT is in play over yesterday’s high. However, since many of the UltraShort ETFs underperform their associated indexes in the intermediate to long-term, TBT is best played as a quick, momentum-based trade. If buying TBT on a breakout, consider keeping a tight stop below the breakout level, and selling into strength of the move just a few days later. Unlike steadily trending ETFs, it is not advisable to hold TBT through a normal pullback, in anticipation of another leg up.
Another ETF setup we like for a short-term, momentum-driven trade is Emerging Markets Bull 3X (EDC). Since the U.S. stock markets began rally off last month’s lows, several emerging markets ETFs have outperformed the gains of the domestic broad-based ETFs (as discussed in yesterday’s commentary). As such, one could expect the emerging markets ETFs to lead to the upside again, as soon as, or perhaps before, the domestic markets resume their intermediate-term uptrends. EDC, a leveraged ETF tied to a basket of stocks in several different emerging markets, is one way to take advantage of the next bounce. The daily chart of EDC is shown below:
Notice EDC closed just a hair below support of its 20-day exponential moving average (the beige line), but held support of its April 21 low. This pullback to the prior low, right in the vicinity of a its 20-day EMA, creates an ideal pullback buy entry in anticipation of a resumption of the uptrend off the March low. Our trigger for buy entry into EDC is just above yesterday’s high, which puts it back above the 20-day EMA as well. If EDC rallies back to its April high and stalls, we can still close the trade for a solid profit. However, if the U.S. markets kick in gear again, EDC could easily break out above its April high and make another leg up. Right now, buying pullbacks to support may be a safer bet than buying breakouts above resistance. Regular subscribers should note our specific trigger, stop, and target price for EDC below.
Today, at 2:15 pm ET, the Federal Reserve Board will announce their latest stance on interest rates and economic policy. With the Fed Funds Rate already at 0 to 0.25%, we don’t expect any significant action to be taken with regard to rates. However, as always, traders and investors will be focused on the Fed’s commentary regarding economic conditions. Expect the usual whippy and volatile broad-based price action to follow, though that won’t be much different than what we’ve been seeing over the past week. It’s a good time to keep your powder dry until stocks decide whether they want to continue correcting to the downside, or forget about it and just resume their recent uptrends. Being lightly positioned over the past week has prevented us from churning our accounts throughout this choppy, sloppy price action.
Today’s Watchlist:
Emerging Markets Bull 3X (EDC)
Long
Shares = 90
Trigger = 52.40 (above yesterday’s high)
Stop = 44.78 (below the 61.8% Fibonacci retracement)
Target = 67.10 (resistance of Jan. 2009 high)
Dividend Date = n/a
Notes = See commentary above for explanation of the setup. Note our very small share size, in order to adjust for the very high volatility of EDC.
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 Alert, we made a judgement call to use a tight stop on FXP after it gapped into resistance of its 20-day EMA and immediately reversed on the open. Since FXP hasn’t acted that well since our entry, we figured it was better to just lock in a decent gain and move on.
- 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.
-
FXY long (250 shares from April 24 entry) – bought 102.41, stop 99.48, target 112.20, unrealized points = + 0.38, unrealized P/L = + $198
SDS long (150 shares from April 22 entry) – bought 66.96, stop 63.62, target 73.30, unrealized points = (0.33), unrealized P/L = ($50)
Closed positions (since last report):
-
FXP long (400 shares from April 20 entry) – bought 20.75, sold 21.65, points = + 0.90, unrealized P/L = + $344
Current equity exposure ($100,000 max. buying power):
- $35,795
Notes:
Edited by Deron Wagner,
MTG Founder and
Head Trader