Commentary:
Stocks gapped higher on the open, sold off to parity shortly thereafter, then flat-lined through the rest of the day. It was a rather uneventful finish to a solid week of gains. Both the S&P 500 and Nasdaq Composite were unchanged, while the Dow Jones Industrial Average edged 0.1% higher. The small-cap Russell 2000 slipped 0.1% and the S&P Midcap 400 gained 0.2%. All the major indices closed near the middle of their tight intraday ranges. For the week, the Nasdaq Composite gained 1.8%, the S&P 500 1.0%, and the Dow Jones Industrial Average 0.6%.
Turnover was mixed. Total volume in the NYSE was 7% greater than the previous day’s level. Trading in the Nasdaq eased 4%. In both exchanges, volume was below 50-day average levels. Across the board, declining volume fractionally exceeded advancing volume. Overall, the session was quite a snoozer.
For about the past eight months, the financial industry has generally shown relative weakness to the main stock market indexes. The laggard performance in financials has been one of the weakest points of the broad market’s year-old rally. However, the sector really perked up last week, causing many financial ETFs to break out above long-standing levels of horizontal price resistance. If those breakouts in the financial ETFs hold up in the coming days, it could greatly benefit the S&P 500, which is heavily weighted by financial stocks. The S&P Financial SPDR (XLF), a popular ETF proxy for the overall financial arena, closed at its highest level of the past five months. On the weekly chart, XLF set its highest weekly close of the past eighteen months. The breakout is shown below:
With the KBW Capital Markets SPDR (KCE), which we bought on February 26, we already have one position in the financial sector. However, at the time of entry, we only bought a HALF position of KCE, as we wanted to see more price confirmation before assuming the standard risk. Since then, KCE has performed well, trending steadily higher since breaking out above resistance of its five-month downtrend line. As such, we’re now looking to add to the position on a pullback to support. The 20 and 50-day moving averages, as well as the prior downtrend line, have now become new support, so a pullback to that area is an ideal point to buy additional shares (or start a new position if the original entry was missed). If the pullback doesn’t come, the formation of a tight “bull flag” pattern would also be ideal. The pullback zone of support is shown on the daily chart of KCE below:
This week, we’ll be paying attention to the price action of the euro, which has been in a steady decline against the U.S. dollar since December of 2009. On Friday, the euro gapped up to close above resistance of its 20-day exponential moving average. For short-term momentum traders, this could present a possible buying opportunity for a multi-day pop. However, we’re more interested in the possibility of initiating a new, intermediate-term short position when the euro rallies into major resistance of its 50-day moving average. The action in the euro is represented in the daily chart of CurrencyShares Euro Trust (FXE), shown below:
If FXE rallies above last Friday’s high, it will move above resistance of its three-month downtrend line, annotated by the dashed blue line on the chart above. Above that lies key resistance of its 50-day moving average (the teal line). If FXE makes it to the 50-day MA, it will be the first touch of that pivotal moving average since the current downtrend began. If the chart of FXE was flipped upside down, and it was now in the process of pulling back to support of its 50-day MA, it would provide an ideal buying opportunity because the first pullback to the 50-day MA of a strongly trending ETF usually leads to a resumption of the dominant uptrend. In a downtrend, it’s the same situation, in that the first rally into the 50-day MA provides an ideal entry point for an intermediate-term short position. Of course, timing is the key, as FXE could easily probe several percent above its 50-day MA, running stops, before it sees the resumption of selling pressure. As such, we’ve now begun monitoring the price action of FXE, but it’s too early to consider a detailed entry point right now.
Speaking of flipping the chart of FXE upside down, the inversely correlated ProShares UltraShort Euro (EUO) gives nearly that exact picture. Take a look:
Because of the daily rebalancing of their portfolio of derivatives, most of the leveraged “short ETFs” have the disadvantage of significantly underperforming their underlying benchmark indexes in the intermediate to long-term. As such, we’re more inclined to sell short FXE, rather than buying EUO, if the trade meets our entry criteria. Nevertheless, traders who have a non-marginable cash account, such as an IRA, may be inclined to buy EUO if we sell short FXE. There’s a slight disadvantage, but unlike other leveraged “short ETFs,” there has not been a huge amount of portfolio underperformance with EUO. Notice, for example, that EUO closed at support of its uptrend line, just as FXE closed at resistance of its downtrend line. Over the next week, we’ll keep subscribers updated regarding the possibility of a euro ETF short entry. We also continue to monitor iShares Xinhua China 25 (FXI) for potential re-entry if it breaks out above the downtrend line shown in our March 12 commentary.
Today’s Watchlist:
With the broad market rather extended in the short-term, we’re now in pullback buying mode for most domestic ETFs (such as KCE). However, we’re also monitoring FXI for re-entry on a breakout above its four-month downtrend line. There may also be select opportunities in other emerging markets ETFs, such as iPath India Index (INP), which has been in a tight consolidation for the past week. If any ETFs on our radar screen trigger our criteria for entry, we’ll promptly send an Intraday Trade Alert with details. Nevertheless, most ETFs are not presently trading at levels that provide a positive reward-risk ratio.
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.
- Since we currently have only a half position of KCE, we’re now monitoring for a pullback to support. At that time, we will consider adding additional shares, ideally around the $36.25 to $36.50 area.
- 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