Commentary:
The major indices edged higher in a lethargic session last Friday, capping off a second week of gains on the rebound off the May lows. Stocks drifted higher in the morning, slipped back down in the afternoon, then closed near the flat line. The Dow Jones Industrial Average rose 0.2%, as the S&P 500 and Nasdaq Composite registered identical gains of 0.1%. The small-cap Russell 2000 advanced 0.2%, but the S&P Midcap 400 dipped 0.1%. The main stock market indexes closed just below the middle of their tight intraday ranges.
Volume surged higher in last Friday’s session, but the rise was likely attributed to “quadruple witching” day, the quarterly session in which stock index futures, single stock futures, stock options, and stock index options simultaneously expire. Total volume in the NYSE swelled 51%, while volume in the Nasdaq increased 12% above the previous day’s level. As institutions jockey stocks towards their desired closing prices, turnover typically zooms higher across the board. Yet, despite the faster trade in the Nasdaq, volume in the exchange remained below its 50-day average level. Though stocks have been attempting to exhibit bullish price action since bouncing off their May lows, lighter than average volume levels indicate institutions primarily remain on the sidelines. Without the convincing participation of mutual funds, hedge funds, and other institutions, it’s difficult to be confident of the market’s current recovery attempt.
Like the overall stock market, iShares 20+ Year Treasury Bond Fund (TLT), as well as most of the other fixed-income (bond) ETFs, was quite volatile last month. But since then, volatility in TLT has calmed down, and the ETF has been oscillating in a range. This has led to the formation of a “pennant” pattern on its daily chart, which we have annotated on the graph below:
A “pennant” alone is neither bullish nor bearish. Rather, the pattern usually leads to a resumption of the dominant trend that preceded its formation. Since TLT was in a multi-month uptrend before the pennant formed, odds favor a resumption of that uptrend after TLT moves above the upper channel resistance of the pennant. Therefore, we’re stalking TLT for potential long entry, and plan to buy on a rally above the June 17 high. This correlates to a breakout above the upper channel resistance of the pennant as well. As a bonus, TLT pays a substantial monthly dividend, like most of the bond ETFs, but the adjusted, ex-dividend pricing leads to a lower capital gain.
Several weeks ago, we said we were stalking U.S. Dollar Bull Index (UUP) for potential buy entry on an “undercut” of both its 20-day exponential moving average and prior swing low. Now, UUP is finally setting up to provide the entry point we were looking for. Take a look:
Buying a dip below an obvious level of support, such as the May 21 low, often provides a lower risk entry point than buying a breakout above resistance, especially in the current environment. As such, a pullback entry usually translates into a more positive reward-risk ratio as well. With UUP, we also like the rising 50-day moving average, which should provide solid support just below the current price level. Still, we would like to see a bit of confirmation that the low of the pullback has been reached. As such, we will wait for UUP to rally above its prior day’s high ($24.98) before buying. Regular subscribers to The Wagner Daily should note our detailed trigger, stop, and target prices under “Today’s Watchlist” below.
Depending on how one looks at it, one could legitimately argue recent price action in the broad market has either been bullish and constructive, or disappointing and in danger of rolling over again. At this stage, it’s merely a matter of perspective. Over the past three days, the major indices have essentially been flat and consolidating in a tight, sideways range. Since stocks have moved back above their 20-day exponential moving averages, and even their long-term 200-day moving averages, bulls might suggest last week’s narrow-range trading is merely a precursor the broad market making another leg higher. However, bears could point out the Nasdaq’s struggle at overcoming resistance of its June 3 high since breaking out on higher volume four sessions ago. While the index formed a short-term “double bottom” on June 8, a subsequent “higher high” on the daily chart, necessary for at least a short-term trend reversal, has not yet been confirmed. Intermediate-term resistance of the declining 50-day moving average is also a key technical factor to be aware of. This is all illustrated on the daily chart of the Nasdaq Composite below:
Going into this week, we assume a neutral near-term view, while maintaining a slightly bearish intermediate-term view. If the major indices convincingly surge through resistance of their 50-day moving averages, both our near-term and intermediate-term biases would change, and we have no problem doing so. However, since we focus on trading what we see, not what we think, it’s difficult to must up much enthusiasm for the stock market as the major indices begin testing key resistance levels without much conviction. Until we see the market’s next move, one might consider focusing on ETFs with a low correlation to broad market direction, such as commodity, currency, fixed-income, and select international ETFs, rather than most industry sector or broad-based ETFs. Presently, we’re long one commodity ETF (UNG), short one commodity ETF (USO), and long one international ETF (THD). Both UNG and THD are showing unrealized gains, while USO is hanging out near our entry price. As per the commentary above, we’re also stalking both UUP (a currency ETF) and TLT (a fixed-income ETF) for potential long entry this week.
Today’s Watchlist:
iShares 20+ Year Treasury Bond Fund (TLT)
Long
Shares = 150
Trigger = $98.28 (above the June 17 high)
Stop = $94.39 (below the June 3 swing low, plus “wiggle room”
Target = new 52-week high (will trail stop)
Dividend Date = July 1
Notes = See commentary above for explanation of the setup. If this triggers for entry, note that the stop will be adjusted lower after TLT distributes its monthly dividend, in order to account for the ex-dividend price adjustment.
U.S. Dollar Bull Index (UUP)
Long
Shares = 800
Trigger = $25.07 (above the June 18 high)
Stop = $24.22 (below the 50-day MA, plus “wiggle room”)
Target = new 52-week high (will trail stop)
Dividend Date = n/a
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.
- The UUP setup, which we sent via Intraday Trade Alert last Friday, did not yet trigger. However, it remains on our watchlist going into today. No changes to open positions at this time.
- 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