Commentary:
The indecision of recent days continued yesterday, but this time volatility surged as well. The session was a tale of two markets, as stocks sold off sharply in the morning, but reversed to close moderately higher in the afternoon. At its morning low, the Nasdaq Composite was down as much as 1.6%, but the tech-heavy index recovered to eke out a gain of 0.2%. The S&P 500 and Dow Jones Industrial Average followed similar price patterns before settling with advances of 0.3% and 0.4% respectively. The small-cap Russell 2000 showed slight relative weakness by closing unchanged. The S&P Midcap 400 climbed 0.4%. All the major indices finished in the upper 20% of their intraday ranges.
Volume rose across the board, as substantial morning weakness and the subsequent afternoon recovery kept traders on their toes. Total volume in the NYSE rose 10%, while volume in the Nasdaq was 6% greater than the previous day’s level. Despite the increased turnover, volume in both exchanges remained below 50-day average levels. In the NYSE, advancing volume exceeded declining volume by a margin of 2 to 1. The Nasdaq adv/dec volume ratio was positive by 3 to 2.
In the August 24 issue of The Wagner Daily, we analyzed the daily chart of the Oil Service HOLDR (OIH), which was poised to break out above a base of consolidation. Later that day, OIH attempted to break out above the high of the range we were monitoring, but we passed on buying it because of the morning gap up that later fizzled out. The following day, OIH sold off to come back down to the breakout level, which was preceded by two subsequent sessions of nearly flat closing prices. All of this leaves us with a pattern that is still potentially buyable in the coming days, though “scaling in” to the trade with partial share size now makes the most sense. Below is an updated snapshot of the OIH daily chart:
Yesterday morning, OIH sold off to break below the lows of the previous two days, but came into support of its 20-day exponential moving average (EMA), which helped OIH to reverse to finish near the previous day’s close. While that morning weakness may seem bearish, it actually had the effect of shaking out the “weak hands” who sell at the first hint of trouble. This, in turn, absorbed overhead supply, which could now enable OIH to more easily move higher. For this setup, we like the idea of buying an initial half position on a rally above the two-day high (approximately 108.60). The remaining shares could then be added on further price confirmation that OIH will hold its breakout this second time around. The remaining shares could be added over the 111.70 area. Scaling into a position in this manner is a great way to take advantage of a potential opportunity, while still minimizing risk in an indecisive environment.
Market Vectors Steel (SLX) is an ETF in the basic materials sector that has been forming a lengthy base of consolidation in recent weeks. Holding above both its 20 and 50-day moving averages, the trading range in SLX has tightened up. We’re monitoring SLX for a potential breakout above the high of its consolidation, which could constitute a buy entry. The setup is shown on the daily chart below:
On August 20, we initiated a short position in iShares China Xinhua 25 (FXI), as it formed a “bear flag” pattern and ran into resistance of its 20-day EMA. Since then it has drifted slightly lower, but formed a bullish “hammer” candlestick pattern yesterday, as it touched support of its 50-day MA. Often, such a formation is a warning sign to cover a short position, as it often leads to higher prices in the days that follow. However, it’s interesting to note the Shanghai Composite fell nearly 3% overnight. This could lead to opening weakness in FXI, which now has the potential of testing yesterday’s intraday low. If FXI goes on to close below that low, the bullish “hammer” will have failed, and FXI will have fallen below its 50-day MA. The daily chart of FXI is shown below:
The reason we point out the current situation in FXI is not to hype our current short position. Rather, we view the performance of FXI as a leading indicator for the performance of the U.S. markets. Since FXI, along with a few other international ETFs, have been outperforming the gains of the domestic market, a sudden reversal of fortune in those international ETFs could be a reliable warning signal that a correction in the U.S. broad market is forthcoming. Conversely, if FXI shakes off opening weakness and closes sharply higher today, it could be a sign of continued resilience in emerging markets, as well as the domestic markets.
Today’s Watchlist:
Oil Service HOLDR (OIH)
long
Shares = 200 total
Trigger = 100 shares (half position) above $108.65, remaining 100 shares above $111.75
Stop = $104.72 (initial 100 shares only; will raise stop substantially if remaining shares trigger)
Target = no target (will trail stop based on price action)
Dividend Date = n/a (individual stocks in portfolio pay dividends regularly)
Notes = See commentary above for explanation of the setup.
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.
- Per Intraday Trade Alert, we re-entered TWM yesterday. No target at this time, as we plan to monitor price action and trail a stop if it moves higher.
- We have tightened the stop in FXI, as per the analysis in our commentary above.
- 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