Stocks kicked off the week on a positive note, as the major indices staged a strong, bullish reversal day for the first time since the broad-based correction began in mid-July. Follow-through weakness from the previous day's session gripped the market during the first ninety minutes of trading, but the bulls took control and reversed the bias around mid-day. In the afternoon, stocks trended steadily higher before finishing at their intraday highs. The S&P 500 rallied 2.4%, the Dow Jones Industrial Average 2.2%, and the Nasdaq Composite 1.4%. The small-cap Russell 2000 and S&P Midcap 400 indices were higher by 1.5% and 1.3% respectively. Off all the major indices, only the Dow completely erased all of the prior day's losses. The S&P 500 made a valiant attempt, but settled just shy of its August 3 high.
The broad market tried to initiate a bullish reversal day on August 1, but higher volume across the board was missing from the equation. Not so this time. In both the NYSE and Nasdaq, total volume increased 8% above the previous day's levels. The solid gains on higher volume enabled both the S&P and Nasdaq to score a bullish "accumulation day," the first clear sign of institutional buying since the current downtrend began nearly a month ago. How far stocks retrace off their lows will largely depend on the volume patterns of the market in the coming days. Be on the lookout for any further instances of higher volume selling, as just one or two "distribution days" could easily undo yesterday's gains. Conversely, further instance of institutional buying, combined with lighter volume pullbacks, would help to absorb the overhead supply created by the stock market's recent losses.
In yesterday's Wagner Daily, we said, ". . . market internals last Friday reached the kind of extreme levels that often precede a short-term bottom . . . Obviously, this doesn't guarantee the market will bounce today, especially given the degree of last week's technical damage. Nevertheless, the risk/reward of entering new short positions at current price levels is not very good." Fortunately, this warning sign from last Friday's extreme TRIN reading put us on guard for a possible bullish reversal. As such, we made a few nimble, pro-active moves yesterday that prevented us from giving up the gains on our short positions and missing low-risk entries to play the long side of the bounce.
On the afternoon of August 3, we took a bearish position in the S&P Midcap 400 Index through buying the inversely correlated UltraShort MidCap 400 ProShares (MZZ). Less than four trading hours later (yesterday morning), MZZ had surged to a gain of more than 3 points (5%) above our average entry price of $56.68. Although our original price target was a gain of more than 5 points, we sent an intraday e-mail alert to subscribers of The Wagner Daily yesterday morning, informing them we were making a judgment call to sell MZZ into strength, near what turned out to be its intraday high. Because MZZ tracks a broad-based index, a gain of more than 5% (half that for the actual index) in just four hours time was too big of a move in too short of a time. If such a move had occurred near the beginning of a sell-off or after a large bounce, we may have let the gains run free. But our August 3 entry was from what already could have been considered a slightly "oversold" condition in the stock market. Therefore, it simply made sense to take the quick and easy 3-point gain, rather than holding through a potentially steep pullback. Second, we simply wanted to avoid the short side of the broad market ahead of this afternoon's Federal Reserve Board meeting on economic policy. After locking in gains just below its intraday high, MZZ sold off while the market rallied, closing just above our August 3 entry point.
After closing out MZZ in the morning, we began to notice several factors around mid-day that caused us to believe we were in the midst of a bullish reversal day. The Financial sector, which has been leading the market lower, suddenly began showing relative strength. Many other sectors did as well. When we observed that the S&P and Nasdaq were both on pace to register "accumulation days," we decided to play the bullish momentum through buying the Fidelity Nasdaq Composite Index (ONEQ). Specifically, we liked how the Nasdaq Composite perfectly bounced off support of its 200-day MA yesterday, undoubtedly a factor in the upside reversal:
Per e-mail alert, we bought ONEQ just before 2:00 pm ET, as it pulled back from its mid-day high. It zoomed higher in the final two hours, enabling us to finish the day with a marked-to-market gain of just over 1 point. Assuming we have enough of a profit buffer, we will hold ONEQ through the afternoon FOMC announcement on interest rates and economic policy. Otherwise, we will simply lock in the gain around mid-day, then re-assess for a potential re-entry later in the day. As always, the market's reaction to the Fed meeting is a wild card, but we're presently only positioned in one short and one long.
Given yesterday's reversal, there's a good chance the bulls will retain control for at least the next week. Again, the key will be whether or not volume patterns remain positive. There's no problem with grabbing stocks and ETFs with relative strength to play the bounce, but this is NOT the time to hold out for extraordinary gains. If you normally utilize a trailing stop strategy, for example, you might consider selling into strength when you have a decent gain instead. We'll be watching closely for signs of the buyers relinquishing control back to the sellers in the coming week(s), at which point we will look to reduce long positions and get short again. Although the short-term trend is now "up," the intermediate-term trend remains "down." What happens after the Fed is anybody's guess.
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:
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 the most recent ETF Trend Tracker, e-mailed to subscribers last weekend. 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:The bears remained in control last week, causing the major market indexes to plunge deeper into their descending trends. Most indices closed at their lowest levels of their respective downtrends. As many indexes are just above or below their pivotal 200-day moving averages, expect continued high volatility and possible choppiness in the coming week. On this week's ETF Trend Tracker, notice that we have lowered several MTG Stop levels (S1) to reduce initial entry risk on new short positions. The Market Segment ETFs in the "descending trend" list have already made some nice gains since triggering on the short side. The Dow Dividend (DVY), for example, has already fallen 10% since recently reversing into the descending trend.
The majority of the Industry sectors on the "descending trend" list are now showing gains on the short side. This is noted by negative green color values in the "% Change" column of the report. When there are more green values than red values in the list, it indicates the trends are showing an excellent "hit/miss" ratio. It is also important to realize that a snapshot of each trend's performance is necessary when considering closing positions mid-trend, or prior to an actual trend reversal. Following the updated stop prices in each week's ETF Trend Tracker gives you a better chance of exiting positions mid-trend and with gains. On each week's report, remember that updated reversal triggers and stop prices can be quickly noted by looking for the cells shaded in pink color.
Corporate bonds (LQD) were again flat last week. Other fixed income (bond) ETFs headed slightly higher, just above their entry triggers.
Nearly every International ETF closed lower for the week. Similar to the domestic market, these ETFs not only posted new lows (of their respective trends), but also closed the week near their lowest levels, near the lower portion of their ranges. Look for more bearish trend reversals to trigger if the domestic weakness continues. Japan (EWJ) was the only new entry to the "descending trend" last week.
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.