UltraShort Euro ETF ($EUO) set up for pullback entry

market timing model:

Buy – Signal generated on the close of August 16 (click here for more details)

today’s watchlist (potential trade entries):

today's watchlist
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open positions:

Below is an overview of all open positions, as well as a report on all positions that were closed only since the previous day’s newsletter. Net P/L figures are based on two separate $50,000 model portfolios (one for ETFs and one for stocks). Changes to open positions since the previous report are listed in pink shaded cells below. Be sure to read the Wagner Daily subscriber guide for important, automatic rules on trade entries and exits.

open position summary
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closed positions:

open position summary
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ETF position notes:

  • Note the change to the share size and trigger in EWW.

stock position notes:

  • Note the change to the share size in AFFY.
  • The TFM setup was cancelled because it reports earnings on August 29.

ETF and broad market commentary:

Holding onto the gains of the previous day’s rally, stocks concluded the week on a positive note. The Nasdaq Composite gained 0.5%, while both the S&P 500 Index and Dow Jones Industrial Average rose 0.2%. One of the most positive aspects of last Friday’s session was another display of relative strength in the small-cap Russell 2000 Index, which tacked on 0.8%. The S&P MidCap 400 Index advanced 0.5%. Although stocks traded in a relatively narrow range throughout the day, all the main stock market indexes closed near their intraday highs.

Total volume in the NYSE was 9% greater than the previous day’s level, but turnover in the Nasdaq eased 16%. Given that the Nasdaq showed relative strength to the S&P and Dow last Friday, it would have been better if volume levels in the Nasdaq were a bit higher. Furthermore, considering that last Friday was also monthly options expiration, a day which normally sees greater stock market volume to begin with, it would be fair to say that the overall pace of trading last Friday was quite light. As is common in the summer doldrums, total volume levels in both exchanges were lighter than average. In fact, it has been 11 days since turnover in the NYSE even exceeded its 50-day average level. Until we see the return of institutional trading activity, probably sometime early next month, we expect momentum in the markets to be subdued.

Since selling off to “undercut” support of its 50-day moving average two weeks ago, the inversely correlated ProShares UltraShort Euro ($EUO) has been trading in a tightening, sideways range, holding above support of its primary uptrend line and 50-day moving average. As the daily chart below illustrates, the primary uptrend has been in place for many months, while $EUO has been in a four-week retracement off its July high:

$EUO Pullback Buy

This type of chart pattern shown above is normal and healthy, and is indicative of what a steadily uptrending stock or ETF typically looks like. Whenever one trendline is moving in one direction (the dashed blue line) and another trendline is moving in the opposite direction (the dotted red line), the longer-term trendline typically wins out. This is why we always say that the longer a trendline has been in place, the more likely the trend will remain intact. In this case, odds favor a resumption of the dominant uptrend in $EUO. Further, because this is a Pullback entry, the reward to risk ratio of the trade setup is favorable. For this pullback entry, our trigger for buy entry is $22.11, which is a breakout above the short-term downtrend line (the dotted red line), which neatly converges with last Friday’s high. Our protective stop price will be $21.49, which is below the “swing low” support of August 7. If the ETF moves back below that price, we definitely want to be out of the trade because the dominant uptrend will have been broken. Our exact trigger, stop, target, and share size for this new trade setup are listed in today’s watchlist above.

Going into today’s session, keep a close eye on the performance of $QQQ, which tracks the performance of the Nasdaq 100 Index. Last Friday’s gain put $QQQ within close striking distance of testing major resistance of its late March/early April highs. This does not mean we should suddenly be selling our long positions (since our market timing model is now in a “buy mode”), but a pullback as the index runs into this resistance level would not be surprising. We will possibly analyze $QQQ in our technical ETF commentary later this week, depending on its price action over the next few days.

stock commentary:

$ACAT is forming the handle portion of a cup and handle pattern. We are establishing an early entry on a break above last Friday’s high with a stop beneath the two day low. We expect the price action to breakout above 46.00 during the next week or two. Trade details can be found in the watchlist section above.

$ACAT chart pattern

Although $TFM remains a valid setup, we removed it from the watchlist because it reports earnings August 29. For those still interested $TFM is an unofficial buy at 61.15 with a stop of 58.74.

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relative strength combo watchlist:

Our Relative Strength Combo Watchlist makes it easy for subscribers to import data into their own scanning software, such as Tradestation, Interactive Brokers, and TC2000. This list is comprised of the strongest stocks (technically and fundamentally) in the market over the past six to 12 months. The scan is updated every Sunday, and this week’s RS Combo Watchlist can be downloaded by logging in to the Members Area of our web site.