Due to the high volatility in the market last week, this issue of The Wagner Weekly is being sent a few days later than usual. Because we wanted to provide you with the most up-to-date plan of action to assist you in your investment activities in the coming week, we waited to see how the market would finish last week before sending the weekly newsletter.
Despite the wild swings in the market, our ETF trades have been yielding very profitable results recently. In general, we waited for and sold short a few ETFs into the highs of the broad market bounce on August 8 and 9, then covered into weakness just before last Thursday's reversal off the lows. The net results for our broad market shorts were an average gain of 4.24 points on RWM long (the inversely correlated Short Russell 2000 ProShares) and an average gain of 3.47 points on DXD long (UltraShort Dow 30 ProShares). We also netted more than 7 points on a two-day short sale of OIH (Oil Service HOLDR). The details of these trades can be found in the "Closed Positions" section of last week's Wagner Daily issues. We have just updated the archives through August 17, so feel free to browse through last week's issues by clicking here. Following is the commentary and market analysis that was sent to Wagner Daily subscribers yesterday. Enjoy. . .
Curiously following the previous day's reversal pattern, the Feds announced a surprise rate cut last Friday morning that sparked a broad-based rally. The S&P 500 zoomed 2.5% higher, the Nasdaq Composite 2.2%, and the Dow Jones Industrial Average 1.8%. The small-cap Russell 2000 and S&P Midcap 400 indices gained 2.2% and 2.1% respectively. Based purely on the percentage gains, one might assume it was quite a bullish day, but the intraday price action of the broad market actually left a lot to be desired. The major indices marked their highest levels of the day on the opening gap, then subsequently fell to nearly unchanged levels just ninety minutes later. Buyers gradually returned later in the day, but the main stock market indexes still closed below their opening prices and barely in the upper third of their intraday ranges. Overall, one could reasonably suggest it wasn't a very convincing day, especially considering the typical bullish reaction that a surprise half-point rate cut would generate.
Perhaps the biggest problem with last Friday's action was the lack of higher volume that should have accompanied the follow-through of Thursday's bullish reversal day. Total volume in the NYSE dropped 17% below the previous day's level, while volume in the Nasdaq came in 21% lower. The lower turnover across the board prevented both the S&P and Nasdaq from scoring an "accumulation day" that might have signalled the return of institutional buying. In fairness though, recall that the prior day's trading was among record high levels. Nevertheless, Friday's large price gains on declining volume tell us that Friday's session may have been driven by short covering, as opposed to solid institutional demand for new long positions.
The question on the minds of many traders and investors over the weekend was whether or not the positive reaction from the rate cut will be sustainable for more than a few days. Some traders have even suggested the Fed move will actually have negative consequences for the stock market in the intermediate-term. On a fundamental basis, we have no opinion on the implications of the rate cut. Rather, we are relying on technical analysis to guide us, just as we have always done. Since the major indices are already several percent above the intraday lows of August 16, let's take a look at the key resistance levels we can expect the S&P, Nasdaq, and Dow to test in the coming week. First, check out the daily chart of the benchmark S&P 500 Index:
The two most pivotal resistance levels the S&P may test in the coming days is its 200-day moving average and the upper channel resistance of its intermediate-term downtrend line. On the chart above, the thick orange line marks the 200-day MA, while the descending red line is the upper channel of its current downtrend. If you have any long positions you wish to sell into strength, consider doing so on a rally to the area between the 200-day MA and primary downtrend line (circled in blue). If the S&P happens to blow through its downtrend line, you can always re-enter your long positions. But until that happens, we must assume the current downtrend will continue until the S&P proves otherwise. As you can see below, the Nasdaq Composite also faces resistance of its intermediate-term downtrend line:
Because the Nasdaq showed more relative strength than the S&P 500 on the way down, it has already recovered above its 200-day MA. However, the big area of prior price congestion at current levels is full of overhead supply the index will need to absorb in order to hold steady. The primary downtrend line also looms overhead. Finally, take a look at the Dow:
Having shown even more relative strength than the Nasdaq when the market began its correction, the Dow has not yet even closed below its 200-day MA. Still, there is a lot of overhead resistance. Specifically, the 50-day MA has converged with the primary downtrend line, which will make that level twice as difficult to get through.
In the August 17 issue of The Wagner Daily, we said of the previous day's bullish reversal that "we honestly cannot recommend buying any stocks or ETFs until the market proves that yesterday's reversal wasn't just a fluke to suck in the bulls. With downward momentum so strong, it remains quite risky to be on the long side of the market. As for shorts, you probably want to stay clear of those as well, at least until we see how far the market retraces before running out of gas again." As we enter the new week, our sentiment remains exactly the same.
Sure, last Friday's action was a welcome relief from the downward pressure, but it was not the type of convincing follow-through that would get us excited to start buying again. Since the major indices closed below that day's opening highs, it remains to be seen whether or not the gap up was just a knee-jerk reaction that will quickly fade into the sunset. Due to vast levels of overhead resistance in the broad market, we should begin to see the formation of new short setups within the next 1 to 3 days. If the main stock market indexes break out above their downtrend lines, our negative short and intermediate-term biases might change, but there's not point discussing that until it happens. For now, we remain "flat and happy" in our hedge fund, patiently waiting for the next clear trade setups to present themselves.
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.
Per the commentary above, we are flat right now. As such, there is no Stalk of the Week this week.
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:Another week of heavy volatility fell upon us again, but did not cause too much damage in either trend direction as of Friday's close. As such, we did not change any stops in the Market Segments. If the large ranging days begin to stabilize, we will narrow the Stops and work them tighter to reduce risk or preserve gains. We did notice that the Midcaps (MDY) did not recover as well as the other indices and remains well below our trigger level. The Nasdaq 100 (QQQQ) and the Dow 30 (DIA) rallied back up to near their trigger levels.
The volatility took down more ETFs in the Specialty sector. Clean Energy (PBW) and Water Resources (PHO) were hit. PBW has been extremely choppy and has been experiencing large swings in its range. Regional Banks (RKH) and Financials (XLF) rallied back quite a bit and took on the recovery the best. Biotech (BBH) remains depressed and is consolidating near the lower portion of its range.
The bellwether mid term T-Bonds (IEF) is now on the ascending trend. The short term T-Bonds (SHY) sprinted higher after breaking into new highs and closed the week near the top of its range. The Corporate Bonds (LQD) remains weak and hit new lows.
All the International ETFs are in the "descending trend" list. Australia (EWA) and Japan (EWJ) showed relative weakness last week and did not move well while other markets rallied. Observe all the updated stops in the current ETF Trend Tracker report.
New features were added to the ETF Trend Tracker report this week. A "percentage risk" column for both the MTG Stop (S1) and Reversal Stop (S2) givea the risk of the stops, relative to the triggered price. In the "ascending trend" sectors, a positive value indicates the gain that would be expected if the price were to decline to that stop price. A negative value indicates the risk or loss expected if the stop were to get hit (inversely with values in the "descending trend" listed sectors). Typically, the S1 is more active and follows the current price more closely due to its use as a mid-trend entry stop. At times, you will notice that the S1 and/or S2 introduce a risk beyond what is a prudent for a trade, usually exceeding 8%, for example. Entering a trade using an appropriately small position size could compensate for this.
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.