Commentary:
A choppy, indecisive of trading yesterday made us pleased to be in “SOH mode” (sitting on hands). Showing significant divergence amongst the major indices, stocks finished with mixed results. After bouncing around in a sideways range, the Dow Jones Industrial Average eked out a gain of 0.1%. However, a weak performance from the tech arena held the Nasdaq Composite down, causing the index to finish 1.2% lower. The benchmark S&P 500 Index declined 0.3%. Both the small-cap Russell 2000 and S&P Midcap 400 indices fell 1.1%. The Dow closed just below the middle of its intraday range, but the rest of the market indexes settled near their lows of the day.
Turnover in the NYSE was on par with the previous day’s level, but total volume in the Nasdaq ticked 3% higher. Monday’s negative session saw heavier volume in the NYSE, but lighter volume in the Nasdaq. Yesterday, the Nasdaq played “catch up” to the weakness in the S&P by registering another “distribution day” as well. In both exchanges, volume marginally exceeded 50-day average levels. The NYSE advancing/declining volume ratio was negative by just 2 to 1. However, declining volume in the Nasdaq exceeded advancing volume by a ratio of more than 6 to 1.
While scanning our workspace that illustrates the relative strength or weakness of various industry sectors, we observed most industries have been falling on pace with, or faster than, the S&P 500 over the past week. But one sector showing notable relative strength is oil. Over the past ten days, the S&P 500 has lost 0.6%, but the ARCA Oil Index ($XOI) has actually gained 3.2% during the same period. This is shown on the “percentage change chart” below:
Even though oil has been showing relative strength to the broad market, the sector is still on a near-term pullback from its recent high. This creates potential buying opportunities in several of the oil-related ETFs. While the S&P 500 has fallen below its 20-day exponential moving average, as well as its prior high from last month, most of the oil ETFs are still above their 20-day EMAs and September highs. For near-term “swing trades,” a nice entry point in most of these ETFs is just above yesterday’s high. Below is the daily chart of Ultra Oil and Gas ProShares (DIG):
Over the past two days, notice how DIG has perfectly held support of its 20-day EMA. If the broad market gets a little bounce going in the coming days, DIG should be one of the first ETFs to rally back to its prior highs and on to new highs. For this setup, we like DIG above yesterday’s high of $37.06. Waiting for the ETF to rally above yesterday’s high helps to confirm the very near-term bottom, and also forces the ETF to move back above its 20-EMA on the hourly chart before buying. With this setup, the immediate price target is merely the prior high of last week. Whether or not DIG breaks out to a new high may be largely dependent on how well the broad market holds up over the next week. Since it’s a very short-term setup, with a rather small profit target, it’s imperative that a stop accompanies any trade entry. Setting an ultra tight stop just below yesterday afternoon’s intraday swing low, around the $35.90 level, makes sense. Traders looking for a more leveraged play might consider buying Energy Bull 3X (ERX) over yesterday’s high instead. Those looking for a non-leveraged ETF should consider S&P Energy SPDR (XLE). Individuals not comfortable with overly short trading intervals of less than a week may prefer to pass altogether.
Presently, we’re long the U.S. Oil Fund (USO), which we initially bought on the October 15 breakout above a major level of horizontal price resistance. Because it has merely traded sideways while the broad market corrected over the past week, USO is showing nice relative strength and is still acting well. In fact, USO, which roughly follows the price of crude oil, may be a better bet than any of the ETFs comprised of individual oil stocks. If USO rallies above yesterday’s high, it will reclaim its 20-EMA on the hourly chart, and will also be positioned to breakout above its recent range:
Also in the energy sector, keep an eye on First Trust Natural Gas (FCG). We recently sold this ETF into strength, locking in a nice gain, but its recent pullback to the 20-day EMA may provide an ideal re-entry point…at a price much lower than where we sold. As with most of the oil ETFs, FCG can be bought above yesterday’s high. Just be sure to keep a relatively tight stop in case of continued broad market weakness:
In yesterday’s commentary, we discussed Monday’s breakout in the U.S. Dollar Bull Index (UUP), and suggested that sudden strength in the greenback was a contributing factor to that day’s decline in the main stock market indexes. Throughout yesterday’s session, we continued to observe a rather close inverse relationship between the U.S. dollar and the broad market. It seemed as though every uptick in UUP led to a downward movement in the broad market (and vice versa). While we actually feel the broad market now has a decent chance of bouncing higher in the near-term, the newfound strength in the U.S. dollar may keep any stock market rally attempts in check. As such, we continue to lay low on both sides of the market, focusing primarily on managing existing positions, rather than entering new ones.
Today’s Watchlist:
If USO trades through the 40.88 level, we will add an additional 50 shares to the position. This would give us a total position size of 200 shares, at which point we would update the stop in tomorrow’s newsletter. Other than the additional shares of USO, there are no new “official” trades in today’s commentary. Still, if anything new is entered, 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.
- SEA hit our stop yesterday, as a negative reaction from the earnings of DryShips (DRYS) weighed heavily on the shipping sector. Meanwhile, FAZ continued moving higher.
- 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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Notes:
Edited by Deron Wagner,
MTG Founder and
Head Trader