U.S. Oil Fund (USO) setting up for short entry


Like the previous day, stocks leapt higher out of the starting gate yesterday morning, but this time the bulls retained control for the entire day. The main stock market indexes held onto their opening gains, consolidated in a narrow range throughout most of the session, then pushed slightly higher into the close. The Nasdaq Composite galloped 3.7% higher, the S&P 500 3.3%, and the Dow Jones Industrial Average 2.9%. The small-cap Russell 2000 charged 4.3% higher, as the S&P Midcap 400 Index rose 3.8%. All the major indices closed at their intraday highs and best levels of the week.

In both the NYSE and Nasdaq, advancing volume absolutely destroyed declining volume, meaning nearly every stock in the market moved higher yesterday. However, one critical element missing from yesterday’s apparent buying panic was higher volume. In the NYSE, total volume receded 26%. Turnover in the Nasdaq was similarly 21% lighter than the previous day’s level. Despite the large percentage gains in the broad market, the substantially slower pace of trading tells us mutual funds, hedge funds, and other institutions remained on the sidelines. Panic buying should be backed by monstrous volume, indicating the presence of institutional accumulation, but turnover couldn’t even keep pace with the prior day’s levels. As such, yesterday’s rally should be viewed with suspicion because light volume bounces do not form significant market bottoms. Until significant, higher volume gains start coming back into the market, any new buy entries should be approached with a very near-term, momentum-driven outlook. With a long holiday weekend on tap, volume is likely to remain tepid in today’s session as well.

If yesterday’s gains had been more moderate, we might have spotted one or two short-term buying opportunities going into today’s session. But the problem is that both the S&P and Dow closed right at major resistance of their 200-day moving averages, which they sliced through last week. The declining 20-day exponential moving averages, as well as multi-month downtrend lines, are also just overhead, providing additional technical resistance. When combined with the fact that yesterday’s volume was so light, resistance of these key moving averages makes for poor reward-risk ratios on the long side now. Take a look at the daily charts of the S&P 500 SPDR (SPY) and Dow DIAMONDS (DIA), two well-known ETF proxies for the S&P 500 Index and Dow Jones Industrial Average:



The short-term trends may try to reverse to the upside, but the intermediate-term trends remain down. As such, the wisest plan of action over the next week may be to look for new short selling opportunities on ETFs with relative weakness that bounce into major overhead resistance levels, unless the market suddenly starts printing solid, higher volume gains. Rather than selling short the broad-based ETFs such as SPY or DIA, which are presently quite volatile and prone to running stops, we prefer short entries into industry sector or international ETFs that recently led the market to the downside by falling at a greater pace (relative weakness).

One such ETF we’re monitoring for potential short entry is the U.S. Oil Fund (USO). In our May 24 commentary, we mentioned this ETF as a candidate to sell short on a bounce, and now it’s finally getting a decent bounce. The general setup is shown on the daily chart of USO below:


Just as we prefer buying ETFs that pullback to areas with multiple levels of converging price support, it’s always best to sell short an ETF that has more than one area of price resistance. In the case of USO, notice how new horizontal price resistance of the prior lows (the dashed horizontal line) roughly converges with the declining 20-day EMA. This gives us an ideal short entry in the $35.50 to $36 area. Although resistance is technically closer to the $35 level, a probe above the obvious area of resistance (a “stop run”) is likely. If selling short at that level, a protective stop could then be placed just above the 200-day moving average, which is also more than a 61.8% Fibonacci retracement from the May high down to the May low. If USO rallies beyond that level, we would no longer want to be short, as the ETF could easily rally back to its prior highs thereafter.

Another dead industry sector to consider selling short into a bounce is healthcare (PPH, BBH, IBB, XBI, etc.). Although the major indices are now well off their recent lows, the various healthcare ETFs are barely bouncing. All of them, for example, underperformed the gains of the broad market yesterday. If an ETF is so weak that it barely bounces when the main stock market indexes bounce sharply, it will usually be the first ETF to plunge to new lows when the buying pressure on the broad market recedes. Potential short entry points are shown on the daily charts of Pharmaceutical HOLDR (PPH) and iShares Nasdaq Biotech Index (IBB):



As always, patience to wait for the proper entry point in these short setups is crucial. Selling short too soon usually leads to quickly getting stopped out of the trade because “short squeezes” after the first wave down can be vicious. Nevertheless, there is also the possibility these weak ETFs may not actually rally to our ideal short entry points, in which case we may scale into the trade with partial share size. Additional shares can then be added upon receiving confirmation the resumption of the intermediate-term downtrends is underway.

NOTE: On Monday, May 31, the U.S. markets will be closed for the Memorial Day holiday. As such, The Wagner Daily will not be published that day. Regular publication will resume on Tuesday, June 1. Enjoy the long weekend and thanks to our past and present service men and women.

Today’s Watchlist:

U.S. Oil Fund (USO)

Shares = 200
Trigger = $35.78 (probe above the convergence of price resistance)
Stop = $38.43 (above the 200-day MA and 61.8% Fibonacci retracement)
Target = new 52-week low (will trail stop)
Dividend Date = n/a

Notes = See commentary above for explanation of the setup. Since we’re not sure exactly how high USO will bounce before starting to head back down, the trigger price is subject to change. In the event of any change, we’ll send an Intraday Trade Alert with details. Also, subscribers with non-marginable, cash accounts might consider buying DTO or SZO, inversely correlated “short ETFs,” rather than selling short USO, if it triggers. However, our “official” play is a short sale of USO.

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.

    position summary

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  • UNG moved back above its 50-day MA on increasing volume. It has also formed the right shoulder of a bullish, inverse head and shoulders pattern on its daily chart. We anticipate upside follow-through in the coming days.
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      Edited by Deron Wagner,
      MTG Founder and
      Head Trader