Commentary:
Stocks launched the week with a session of losses that caused the main stock market indexes to surrender nearly all of the previous day’s substantial gains. Equities got off to a lower start on the open, stabilized, but were unable to recover their losses from the gap down. This time, the S&P 500 and Dow Jones Industrial Average played “catch up” to the Nasdaq, which ignored strength in the rest of the major indices by moving lower in the latter half of last week. The S&P fell 2.2%, the Dow declined 1.8%, and the Nasdaq Composite lost 0.5%. The Nasdaq 100 actually eked out a gain of 0.1%, but the index is still down 2% over the past three days. The small-cap Russell 2000 and S&P Midcap 400 indices slid 1.9% and 2.3% respectively. The S&P and Dow finished near their intraday lows. The Nasdaq closed just above the middle of the day’s range.
Turnover declined quite a bit, which helped to explain yesterday’s intraday vacillation and lack of direction. Total volume in the NYSE receded 17% below the previous day’s level, while volume in the Nasdaq ticked 21% lower. In the Nasdaq, total volume dipped below its 50-day average level, but NYSE volume remained at a faster than average pace. Market internals in the NYSE were firmly negative; declining volume exceeded advancing volume by a margin of 5 to 1. The Nasdaq adv/dec volume ratio was basically in equilibrium.
As it often does, the 200-day moving average of the Nasdaq Composite has acted like a magnet over the past week, defining a clear “line in the sand” for the direction of the index. From May 4 through 7, the Nasdaq closed just above its 200-day moving average. But because the initial test of 200-day MA resistance is rarely successful, the Nasdaq slid back to close below its 200-day MA on May 7. In both the sessions that followed, the Nasdaq probed above its 200-day MA on an intraday basis, but was unable to close above it both times. This is shown on the daily chart of the Nasdaq Composite below:
After the Nasdaq first ran into its 200-day MA on April 30, we said the long-term indicator of trend often acts like a “brick wall” the first time the price of a stock, ETF, or index runs into it. Now, less than two weeks later, the chart above has become a great example of why we said that. But what happens now?
At this juncture, the chart is indicating the Nasdaq could resolve its short-term trend in one direction just as easily as the other. One thing for certain, however, is the longer the Nasdaq remains glued to its 200-day MA, the more powerful the eventual upside or downside breakout will be. Volatility contractions eventually lead to high-momentum volatility expansions once trend direction becomes clear. This is because the numerous traders on the other side of the trend are simultaneously forced to close their losing positions and quickly jump into the other side of the market.
In the short-term, we still believe the overall odds favor a significant stock market pullback, possibly led by the Nasdaq, over the possibility of making another leg higher. HOWEVER, a Nasdaq closing price well above the magnetic 200-day MA could cause us to quickly change our assessment, which, by the way, we have absolutely no problem doing. As the Nasdaq corrects by time (consolidates), the 20-day exponential moving average is rapidly rising to meet the price of the range-bound Nasdaq. When it does, the Nasdaq should be forced to make its intentions clear. The current short and intermediate-term uptrends of the broad market will favor an upside breakout above the 200-day MA, but the problem is the stock market remains firmly stuck in a long-term downtrend. If traders and investors were looking for an excuse to exit positions into strength of the long-term bear market, the 200-day MA would certainly give a good technical reason to do so.
Until the Nasdaq shows its hand at this critical level of support/resistance, it’s a good idea to steer clear of the broad-based ETFs (SPY, DIA, QQQQ, etc.). Instead, consider ETFs in sectors with a low correlation to stock market direction (currency, commodity, and bond ETFs fit the bill). Because they are not tied to the trend of the main stock market indexes, we are quite comfortable with our three open positions: U.S. Natural Gas Fund (UNG), iShares Silver (SLV), and CurrencyShares Japanese Yen (FXY). Since entry, UNG is presently showing an unrealized gain of 12% and SLV is 8% higher. FXY is still near our original entry point, but broke out yesterday, and is now back above its 20, 50, and 200-day moving averages. We continue to build our watchlist of additional ETFs to consider buying on pullbacks to their 20 and/or 50-day moving averages. That watchlist currently includes, among others, the following tickers: EEM, TAN, FAN, and KOL.
Today’s Watchlist:
There are no new setups in the pre-market today. As per the commentary above, we’re laying low with regard to new ETF entries until we see short-term trend resolution in the Nasdaq. But as always, we’ll promptly send an Intraday Trade Alert if we enter anything new.
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.
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Open positions (coming into today):
- No changes to our open positions 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.
- 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.
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UNG long (400 shares from May 6 entry) – bought 14.84, stop 14.22, target 19.80, unrealized points = + 1.82, unrealized P/L = + $728
SLV long (700 shares from May 4 entry) – bought 12.72, stop 12.22, target 15.12, unrealized points = + 1.02, unrealized P/L = + $714
FXY long (250 shares from April 24 entry) – bought 102.41, stop 99.48, target 112.20, unrealized points = (0.24), unrealized P/L = ($60)
Closed positions (since last report):
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(none)
Current equity exposure ($100,000 max. buying power):
- $41,824
Notes:
Edited by Deron Wagner,
MTG Founder and
Head Trader