Broad Market Analysis - Subtle nuances of trading ETFs
Stocks gave up early gains for the second day in a row, as overhead resistance of the 50-day moving average held the S&P 500 in check. The S&P 500, up 0.7% at its mid-day peak, slid to a 0.3% loss in the afternoon. Following similar intraday patterns, the Nasdaq Composite and Dow Jones Industrial Average both closed 0.1% lower. The small-cap Russell 2000 lost 0.2% and the S&P Midcap 400 fell 0.3%. Like the previous day, all of the major indices closed in the bottom third of their intraday ranges.
Turnover was nearly on par with the previous day's levels. Total volume in the Nasdaq increased by 2%, but volume in the NYSE was unchanged. The 0.1% loss in the Nasdaq was technically not substantial enough to label the session another "distribution day," but the index has still had at least four such days of institutional selling within the past several weeks. The S&P has had five "distribution days" since its early-June peak. In both exchanges, declining volume exceeded advancing volume by margins of approximately 2 to 1. Overall, internals were not overly negative. However, leading stocks began to see selling pressure that was concealed by the modest losses in the major indices.
The S&P 500 has closed below its 50-day moving average in each of the past three sessions. Yesterday, the index attempted to move back above that key level, but reversed lower after being unable to do so. The S&P also tested support of its June closing low at the 1,490 level, but closed two points above it:
The above chart is a good example of the most basic tenet of technical analysis -- a prior level of support automatically becomes the new resistance level after the support is broken. The inverse of that statement is true as well. While the 50-day moving average enabled the S&P 500 to bounce higher on three separate occasions this month, the index will now be inclined to sell-off every time it rallies into overhead resistance of its 50-day MA.
If you are new to trading exchange traded funds (ETFs), there are subtle nuances to be aware of. Yesterday's action clearly contained two of those differences we will explain. The first difference between stocks and ETFs is that most of the broad-based ETFs conclude trading at 4:15 pm ET, fifteen minutes after the close of the regular session, but the same time that the S&P and Nasdaq futures wrap up their regular session. Stocks, of course, register their final closing prices at 4:00 pm ET. Most of the time, this doesn't make a big difference either way. However, the futures markets sometimes make large moves in that fifteen-minute window. Yesterday was one such occurrence. This is illustrated on the 5-minute intraday chart of the S&P 500 SPDR (SPY) below:
As you can see, SPY moved 72 cents lower between the regular close of 4:00 pm and its "official" closing time of 4:15 pm. This was due to an end-of-day wave of selling in the futures markets that, as you might have guessed, pushed the S&P futures below pivotal support of its June low. Based on yesterday's bearish close in the futures, the S&P 500 is now positioned to open just below its prior low from June, so be prepared for a volatile open. An abundance of stops just below the June lows are likely to result in whippy trading this morning.
The second subtlely to remember about ETFs is that they have regular dividend distributions, just like stocks. However, depending on the underlying composition of the ETF, their distributions can sometimes be much larger than with individual stocks. Specifically, we are referring to the ProShares family of inversely correlated and leveraged ETFs, each of which made rather large dividend distributions and traded "ex-dividend" yesterday.
Because ETFs are derivatives, they will always trade in lock-step with the daily price action of their underlying components. In the case of broad-based ETFs that track indexes such as the S&P 500, Dow Jones, or Nasdaq, it's even more of a no-brainer because they move up or down by approximately the same percentage of their corresponding indexes. But occasionally, you might wake up to find a substantial price discrepancy between the index and the ETF. If so, don't worry. It's not an error in the computerized algorithm. Rather, the most likely explanation is that your ETF had a dividend distribution on that date. Such was the case yesterday, with our long position in the ProShares UltraShort S&P 500 (SDS).
At yesterday's open, the inversely correlated SDS was instantly showing a loss of just over 1% from the previous day's close (about 60 cents per share). Yet, the S&P 500 opened the day only fractionally higher. The reason for the difference was simply that SDS paid out a dividend of 0.43 cents per share yesterday. When stocks and ETFs trade "ex-dividend," they automatically gap down by the amount of the dividend distribution that day, not factoring in any normal changes in supply or demand. Since the actual dividends subsequently show up as a cash deposit in your trading account, the whole transaction is a wash.
In the case of SDS, the dividend of 0.43 per share will be paid to shareholders on July 2. If you add 43 cents to yesterday's closing price of SDS, you get the actual price it would have closed at if there had not been a dividend distribution. Whenever an ETF has a distribution, we automatically adjust our original stop and target prices lower by the amount of the dividend payout. The gain from the actual dividend is then included in the recording of the trade's profit or loss. Including its dividend distribution, SDS is presently showing an unrealized gain of nealry 1.5 points since our entry on June 22.
Despite its small loss, the Dow Jones Industrial Average joined the list of broad-based indexes now trading below their 50-day MAs. Of the five major stock market indexes we monitor daily, the Nasdaq Composite is the only one that remains above its 50-day MA. It has touched it in each of the last two sessions, but closed above it both times. Though the Nasdaq still has more relative strength than the other indexes, it too is beginning to feel the weight of the rest of the broad market.
Today begins a two-day meeting of the Federal Reserve Board, which concludes with an announcement on interest rates and economic policy on Thursday afternoon. Virtually nobody is expecting an increase in the Fed Funds Rate, but economists and traders will be closely monitoring the wording of economic policy going forward. As usual, expect trade to remain light ahead of tomorrow's announcement.
If you wish to learn about Morpheus Trading Group's ETF trade entries on the same day they occur, sign up for a free trial to The Wagner Daily or other MTG services by clicking here (limit one per household). Also, remember that all previously published issues of both The Wagner Daily and The Wagner Weekly are available in the MTG archives. If you are new to our services or wish to broaden your knowledge of ETF trading or our general trading style, we recommend you browse the archives because it is educational and free! Click here to visit the Wagner Daily archives or here to visit the Wagner Weekly archives.
In this column, MTG presents you with a FREE, actual trade setup that we are stalking for entry at some point during the week. Note that, unlike the daily guidance that regular Stalk Sheet subscribers receive, this free Stalk of the Week does not take into account overall broad market conditions that can easily affect the trade over the next several days. This week's setup is:
Last week's Stalk of the Week, CHAP short, stopped out due to a wild, multi-point price spike that occurred within a matter of minutes on June 22. However, the MTG Stalk Sheet re-entered the short position on yesterday's breakdown below the recent range. Presently, our re-entry is showing an unrealized gain of just under 1 point.
Click to receive your free 1-month trial to The MTG Stalk Sheet so that you can receive an average of one to three trade ideas such as this one on a daily basis (limit one free trial per household). Subscribers are always provided with detailed entry, stop, and target prices for each trade, and intraday e-mail alerts are sent as needed.
Below is the weekly commentary that accompanied this week's updated ETF Trend Tracker that was e-mailed to subscribers at the beginning of the week. The Morpheus ETF Trend Tracker, a perfect supplement to the ETF Roundup guide, is a comprehensive table of Exchange Traded Funds (ETFs) designed for informed investors and longer-term traders who prefer to hold their ETF positions for a few weeks to several months at a time. Based exclusively on a weekly analysis of trendlines on the daily and weekly charts, the ETF Trend Tracker provides subscribers with a thorough snapshot of the primary trend direction of ETFs in every category from broad-based to industry sector to international. This information is e-mailed to subscribers weekly, in a user-friendly format that groups ETFs based on the direction of their primary trends.
Commentary:Volatility picked up last week, as the major stock market indexes moved significantly lower. Several of the broad-based indices may have formed "double top" chart formations, which offer defined resistance levels that can used to easily determine the risk to reward ratio on new short sale trade entries. While most Market Segment ETFs formed "lower highs," the Nasdaq 100 (QQQQ) briefly posted a higher high last week. Check out the updated stop prices and annotated charts in this week's ETF Trend Tracker.
Several industry sectors are rolling over and heading into new lows on their current trend channels. Real Estate (IYR) remains quite weak, trading at its lowest level since last November. Biotech (BBH) is also hurting, but is approaching some solid support levels. Oil Services (OIH) continues to press higher and into new all time highs. Semiconductors (SMH) posted a fresh 52-week high, no doubt contributing to the relative strength in the tech-heavy QQQQ. Utilities (XLU) are crumbling, forming consecutive "lower highs" and "lower lows." Notice the inverse correlation to the price of the Utilities sector with the recent rise in Treasury rates.
The fixed-income ETFs are trying to recover a little, but are not making much ground. The short-term bonds (SHY) stood out by closing at the highs of the week.
A handful of International ETFs edged over to the "ascending trend" list, but prices did not follow through and remain near the trigger prices. Taiwan (EWT) and China (FXI) have accelerated almost parabolically higher, so it might be prudent to follow stops closely in order to lock in maximum profits. Brazil (EWZ) is a good example of how recent volatility has created a lot of chop in the international markets. Although EWZ has performed well on the ascending trend, the choppy nature of the recent pattern is cause for concern. Malaysia (EWM) and Hong Kong (EWH) are others that we identified as having a choppy pattern.
Alert of imminent reversal to the upside:Click to receive your free 1-month trial to the ETF Trend Tracker (limit one free trial per household), which will be e-mailed to you every week, along with intra-week updates on an as-needed basis.