Commentary:
A strong opening in the stock market quickly faded last Friday morning, causing the major indices to finish near the flat line and with mixed results. After briefly probing to a new high of the year on the opening bell, the Nasdaq Composite immediately reversed and trended lower throughout the first half of the day. A feeble afternoon rebound attempt lifted the index out of negative territory, but the Nasdaq closed only 0.1% higher. The S&P 500 and Dow Jones Industrial Average followed similar intraday patterns before finishing lower by 0.2% and 0.4% respectively. Small caps showed relative weakness, causing the Russell 2000 to slip 0.7%. The S&P Midcap 400 edged 0.2% higher. The main stock market indexes closed near the bottom third of their intraday ranges, and with modest gains for the week.
Total volume in the NYSE increased 2%, while volume in the Nasdaq rose 9% above the previous day’s level. Although the loss in the S&P 500 was too small to technically declare a “distribution day,” bearish “churning” was abound. When an index trading near the highs of its range closes nearly unchanged, on higher volume, stealth institutional selling into strength, known as “churning,” is usually the culprit. Given the market’s inability to hold substantial opening gains, this was even more apparent in last Friday’s action. Turnover in the Nasdaq exceeded its 50-day average level for the first time in a week, but it certainly wasn’t the type of price action the bulls wanted to see.
Last Friday, we made two trades in the model ETF portfolio. The first was a buy entry into the Oil Service HOLDR (OIH), which we illustrated as a potential buy setup in our most recent commentary. The opening strength of the broad market caused OIH to gap above its highs of the previous two days, thereby triggering our buy entry for a HALF position. However, because of the stock market’s immediate, bearish reversal, the early strength in OIH quickly faded, causing it to slide back into its previous range. As such, we made a judgment call to sell OIH for a very small loss, rather than holding a trade with a trigger price that failed to confirm itself.
On the positive side, precious metals surged higher in last Friday’s session, prompting us to add to our position in Gold Double Long (DGP). In the August 25 issue of The Wagner Daily, we pointed out the bullish “pennant” formation on the weekly chart of SPDR Gold Trust (GLD), the regular, non-leveraged version of DGP. After rising 0.7% last Friday, GLD is now only pennies away from testing upper channel resistance of the “pennant” we recently illustrated. As momentum is picking up and GLD closed at its highest level in weeks, we added another 25% to our existing position in DGP last Friday. The daily chart of GLD is shown below:
In last Friday’s commentary, we discussed the relative weakness iShares China Xinhua 25 (FXI) has recently been exhibiting. Because Chinese ADRs comprised many of the leading stocks that led the U.S. markets higher in recent months, we said that a sudden, bearish reversal in the Chinese market could be a “reliable warning signal that a correction in the U.S. broad market is forthcoming.” Specifically, we were focused on whether or not FXI would follow through on the bullish “hammer” candlestick it formed on August 27 — it didn’t. Rather, it closed near the previous day’s low, and right on its 50-day moving average. If FXI slices through its 50-day MA, and convincingly closes below it in today’s session, we feel it could have the implication of a subsequent correction in the domestic markets. Below is an updated daily chart of FXI:
Overnight, the Shanghai Composite tumbled 6.7%, triggering losses on other Asian exchanges, and undoubtedly putting pressure on the U.S. stock market futures in today’s pre-market session. Obviously, there’s now a very good chance FXI will fall through its 50-day MA today. Based on current indications of the U.S. futures, which are pointing to a substantially lower open for the stock market, we can’t help but believe overnight weakness in China was a significant, contributing factor.
Overall, last week’s session was marked by choppiness and indecision. On August 21, the major indices broke out to new highs of 2009, but they have failed to make significant headway since then. Instead, it’s been a tug-of-war between the bulls and bears, as evidenced by the price action of the past two trading days. With the major indices now exhibiting the real possibility of failing their recent breakouts, be prepared for high volatility in the coming days. It’s probably a good time to sit on the sidelines, focusing on managing existing positions, rather than entering new ones. If the broad market makes a clear move out of last week’s trading range, in either direction, it will provide us with more direction that will increase our odds of staying on the right side of the market.
Today’s Watchlist:
There are no new setups in the pre-market. If we enter anything new, we will promptly send an Intraday Trade Alert with details.
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 added 100 shares to our DGP position. The new average price on the full position of 500 shares is shown above. No changes to the stop at this time, but will trail higher as soon as breakout is confirmed.
- Per Intraday Trade Alert, we made a judgment call to sell our OIH entry shortly after entry, taking a scratch on the trade (win or loss of less than $100).
- 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