Commentary:
Sounding like a broken record, we have no choice but to begin today’s commentary by saying yesterday’s action was basically the same as each of the past three days. Stocks once again faced weakness in the first half of the session, but passed on the opportunity to move substantially lower. This time, all the major indices closed with modest losses, but still finished near the upper quarter of their intraday ranges. The Dow Jones Industrial Average slipped 0.3%, the Nasdaq Composite 0.4%, and the S&P 500 0.5%. The small-cap Russell 2000 and S&P Midcap 400 indices lost 0.6% and 0.7% respectively.
Total volume in the NYSE declined 8%, while volume in the Nasdaq similarly eased 6%. The lighter volume across the board enabled the S&P and Nasdaq from registering a bearish “distribution day.” Institutional trading activity, typically the impetus behind significant moves in the market, was simply dormant. Turnover in the NYSE also fell back below average levels. Market internals were negative, but not by a wide margin. In both the NYSE and Nasdaq, declining volume exceeded advancing volume by a ratio of less than 2 to 1.
Over the past few days, we’ve been analyzing the charts of strong ETFs that may be buyable on a pullback. However, given the incredible intraday resiliency of the major indices, it’s starting to look as though the stock market will correct by time, rather than price. All uptrending markets eventually correct, but not necessarily through means of a pullback. Whereas price retracements to technical support levels are more common (“correction by price”), very strongly trending markets sometimes correct by time instead. This occurs when the major indices consolidate in a tight, sideways range, near their highs (in uptrends), for a period of days, or even weeks. This causes the various moving averages to rise up and meet the prices, thereby triggering a resumption of the dominant trend, in the same manner that a pullback to those moving averages would generate buying interest. Corrections by time are typically marked by volatility contractions, which occur as the sideways trading range of the market narrows. On the daily chart of the Nasdaq 100 Tracking Stock (QQQQ), notice how the 10-day moving average (the dotted purple line) is now nearing the price of QQQQ. The 20-day exponential moving average (the beige line) is also steadily rising toward the price of QQQQ:
If the Nasdaq, or any of the other major indices, convincingly breaks out above the high of its range, it’s unlikely the ETFs we’ve been stalking for pullback entries will retrace very much, at least in the near-term. If that happens, we will temporarily put our plans for pullback entries on hold. Instead, we will go with the flow by focusing on selectively buying ETFs breaking out above their consolidations as well. The only caveat is that any new entries we take will have tight stops, just below their breakout levels. This will help to protect against the possibility of “fakeout breakouts.” When buying a breakout above a tight base of consolidation, we’ve found that tight stops are most effective in protecting against the vicious downside momentum that frequently occurs from failed breakouts. We will also subsequently trail tight stops to protect any profits that develop. In addition to QQQQ (shown above), below are the charts of a few ETFs that could be in play for short-term, momentum trades on a breakout above the highs of their recent consolidations:
In addition to the potential short-term breakout setups above, we still have the following ETFs on our watchlist for pullback entries, just in case we finally get that retracement many traders are waiting for: iShares Nasdaq Biotech (IBB), iShares Spain (EWP), iShares Malaysia (EWM), and Semiconductor HOLDR (SMH). Also, Claymore Global Solar Energy (TAN) has just pulled back to support of its 50-day MA, after recently surging above it. Unlike the major indices, TAN is still below its June 2009 high, but the ETF has begun showing substantial relative strength to the broad market over the past several weeks, making for a low-risk pullback entry just above yesterday’s high of $9.97.
We concluded yesterday’s commentary by saying, “Overall, the stock market has been a bit confused and nervous over the past three days. . .With such indecisive and choppy price action, a sharp move could be on tap in the near-term. But in which direction, you might ask? Frankly, either direction wouldn’t surprise us. A substantial pullback would not be out of the norm, and would certainly be healthy for the longer-term of the market’s current rally. Yet, with no significant overhead resistance to contend with near current levels, the major indices could just as easily rocket higher again. This is a good time to be alert, keeping your left hand on the sell button, and at least a few fingers of your right hand on the buy button.” Since yesterday’s action did not change the current technical picture, our overall thoughts remain the same going into today.
Today’s Watchlist:
Claymore Global Solar Energy (TAN)
long
Shares = 600
Trigger = 10.07 (above yesterday’s high and hourly downtrend line)
Stop = 8.94 (below the 61.8% Fibonacci retracement from the July low to July high)
Target = 13.20 (breakout above the June 2009 high)
Dividend Date = n/a
Notes = As mentioned in the commentary above, we like the pullback to major support of its 50-day moving average, as well as the relative strength TAN has begun exhibiting. A rally above yesterday’s high should lead to a resumption of the short to intermediate-term trend that has developed.
iPath India Index (INP)
long
Shares = 150
Trigger = 52.55 (above the developing hourly downtrend line)
Stop = 48.45 (below the rising 50-day MA support)
Target = new highs (will trail stop)
Dividend Date = n/a
Notes = This setup from yesterday did not yet trigger, but remains on our watchlist going into today. Note that we have lowered both the trigger and stop price. Since INP is basically consolidating near its high, with the 20-day MA rising up to meet it, we have lowered the trigger price to be above the hourly downtrend line from the July 23 high. A move above that level could quickly lead to a breakout above the range. INP has been a leading international ETF for the past several months, and is again poised to make another leg up. We recently sold INP for a large gain, near its current price, but are stalking it for potential re-entry above the highs of the range.
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.
PLEASE NOTE: As of July 1, we have updated to a more “user friendly” format for reporting open and closed positions (see below). Based on the familiar Microsoft Excel style, we believe the new, simplified format makes it much easier to see the status of all positions with just a quick glance. What do you think? We’d love to hear your opinion on the new format change. Just send an e-mail to [email protected].
- DGP missed our stop by just 6 cents before reversing slightly higher yesterday. No changes to its stop.
- 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.
- 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.
Notes:
Edited by Deron Wagner,
MTG Founder and
Head Trader