Following is the commentary that appeared in today's Wagner Daily, which was sent before today's market opening. Enjoy!
As anticipated, divergent chart patterns amongst the major indices led to a choppy, indecisive session yesterday, but the Nasdaq bulls got the upper hand by the closing bell. Broad market price action resembled a roller coaster, as stocks rallied on the open, sold off at mid-day, then reversed again in the final ninety minutes of trading. The Nasdaq Composite climbed 1.5%, but the S&P 500 and Dow Jones Industrial Average bounced just 0.7% and 0.6% respectively, relatively small gains considering the extent of last week's losses. The small-cap Russell 2000 gained 1.4%, as the S&P Midcap 400 advanced 0.8%. All the main stock market indexes closed near their intraday highs.
Curiously, turnover declined across the board yesterday. Lighter volume could be expected ahead of the past holiday weekend, but trading activity usually picks up immediately after a holiday has passed. Not this time. Total volume in the NYSE eased 6%, while volume in the Nasdaq came in 2% below the previous day's level. Higher turnover would have pointed to accumulation by mutual funds, hedge funds, and other institutions, but they stayed on the sidelines instead. Considering it was the first rally attempt following last week's large losses, it's bearish that institutions showed no signs of buying interest yesterday. Low-volume bounces within the context of a primary downtrend often come unraveled easily.
Not surprisingly, the Philadelphia Semiconductor Index ($SOX) moved higher, triggering our long entry into the Semiconductor HOLDR (SMH), which we analyzed in yesterday's commentary. As per the pre-market plan, we bought SMH when it rallied above the previous day's high, less than ten minutes after the open. After the initial opening strength, SMH lacked the kind of momentum we hoped to see, but still finished just a few cents below its high of the day. Again, we're viewing this as just a very short-term momentum trade with a price target of its prior high from May 19. Overall market conditions are simply too weak to expect much more. Although we're showing a small unrealized gain on the trade, we've trailed our protective stop higher, to just below yesterday's low, in order to minimize risk if the rally quickly fizzles out. Separately, we locked in a 3-point gain on the UltraShort Dow 30 ProShares (DXD) yesterday, which we sold due to an anticipated bounce in the Nasdaq. Yesterday, we secured a 10% (10 point) gain by selling our long position in the UltraShort Financials ProShares (SKF).
After scanning the chart patterns of hundreds of ETFs, we came across very few bullish chart patterns with a positive reward/risk ratio. Again, many of yesterday's gainers merely bounced from the lower channel support of their new downtrending channels. None broke out to a new high, although a few sectors such as oil, mining, and steel are still trading near their 52-week or all-time highs. One ETF that still has a very bullish chart pattern is Market Vectors Russia (RSX). Best of all, it has a relatively low correlation to the direction of the U.S. stock market because it's an international ETF. Below is its daily chart:
As you might recall, we traded RSX after it broke out two weeks ago. Rather than holding RSX, we took the profit quickly because our entry to the breakout was a little later than we would have preferred. However, since then, we've been monitoring its price action, waiting for a decent pullback. With the formation of a bullish "hammer" candlestick on its daily chart, buying RSX above yesterday's high presents us with a positive reward-risk ratio for the setup. Regular subscribers to The Wagner Daily will note our specific trigger, stop, and target prices below.
Drilling down to the shorter-term hourly chart of RSX, you will see that a rally above yesterday's high also correlates to a breakout above the short-term hourly downtrend line. When strongly trending ETFs undergo a normal correction, the breakout above the hourly downtrend line typically represents the ideal buy point to anticipate a resumption of the primary uptrend. The blue descending line on the chart below marks the hourly downtrend line (standard moving averages have been removed so you can more easily see the trendline):
On the surface, yesterday's gain in the Nasdaq may seem encouraging, but a closer look at yesterday's action reveals unimpressive performance. Aside from the lighter overall volume, the biggest problem is that most leading individual stocks showed no signs of life yesterday. Instead, many of the top-gaining stocks were those with mediocre chart patterns, in industry sectors that were merely bouncing from positions of weakness. It was hardly the kind of leadership necessary to power the market higher. Although that situation could improve in the coming days, we trade what we see, not what we think. Based on what we saw yesterday, the absolute percentage gains of the major indices may have hinted at strength on the surface, but a look "under the hood" of the market shows a different picture altogether.
The Nasdaq perfectly bounced off support of its intermediate-term uptrend line, but it feels like the reversal may be short-lived. One of the reasons we feel this way is because the index is now forming the right shoulder of a bearish "head and shoulders" chart pattern. The components of this pattern are labeled on the daily chart below (moving averages have again been removed):
With its right shoulder now being formed, the Nasdaq may run into substantial resistance around the 2,500 level, which corresponds to the high of the left shoulder. Additional resistance of the 200-day MA is at the 2,513 level (not shown). Though the Nasdaq continues to show the most relative strength of the major indices, it's starting to look like the index may soon run into trouble as well. This is why we suggested that any new long entries made yesterday (such as our SMH position) be entered with a very short projected time horizon. Nevertheless, we like the idea of having at least one or two long positions on, just in case the Nasdaq happens to rip higher, thereby failing to follow through on its head and shoulders pattern. As long as tight stops are trailed along the way, it's not a bad idea to participate in the strength of the Nasdaq bounce while it lasts.
As for the benchmark S&P 500, it's still in worse shape than the Nasdaq. Although the S&P bounced off support of its 50-day MA yesterday, it now must contend with a plethora of overhead supply left behind in the wake of last week's sell-off. Going into today, expect prior support of the May 9 low to now act as new resistance. Since the S&P closed right at that level yesterday, stocks could face a bit of a struggle moving much higher today. The blue-chip Dow Jones Industrials has a much bigger problem because it's now stuck below its 50-day moving average, trying to prevent free-falling down to its March lows. With minimal technical support below the current price of the Dow, it would not be surprising if such a downward move happened within the next several weeks. If the Dow starts leading the way lower again, we'll probably re-enter the UltraShort Dow 30 ProShares (DXD), especially if the Nasdaq gets in sync with the broad-based weakness as well. Also on the short side, we're monitoring the oil and oil service ETFs, as we've suddenly begun to see some distribution in the energy sector.
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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 Stalk of the Week 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 primary downtrends that have been in place for the past seven months wreaked havoc on the counter-trend bounce that stocks have been enjoying for the past two months. The Market Segments broke down quickly and fell below their prior "swing low" support levels established in early May. Support of key moving averages was also tested and breached for most of the major indices. Only the S&P Value (IVE) technically fell into the "descending trend" list so far, but expect many more ETFs to reverse their trends if the bearish sentiment continues into next week. With "lower lows" being established last week, we'll be watching carefully to see whether or not the major indices form a complimentary "lower high" as well. This would confirm the reversal to the intermediate-term downtrends.
A couple industry sectors fell victim to the bear attack last week, marking a possible beginning of a transition to re-populate the descending trend list again. Early leadership to the downside is coming from industries with relative weakness, which becomes amplified when the broad markets slide as a whole. The Pharmaceutical ETF (PPH) is currently the best performing ETF on the "descending trend" list, indicating a greater than usual amount of relative weakness. Financials (XLF) have also taken a sudden turn for the worse. Industries new to the "descending trend" have their rows highlighted in pink color. Check them out in this week's updated ETF Trend Tracker report. It goes without saying that energy-related ETFs have been insanely strong, though we finally saw the beginning of a correction to close the week. Precious metals, namely Gold (GLD) and Silver (SLV), are also showing renewed strength.
The fixed-income (bond) ETFs are weak, and most settled near their three-month lows. Note we did not observe a rotation of funds into this sector last week, though such action typically occurs during drawdowns in the equity market. A cash position in the fixed-income ETFs may be best right now.
The International sectors were damaged alongside of the domestic markets. China (FXI) is back on the "descending trend" list. It may stay in a range -bound pattern when support levels begin to retard the decline as it moves incrementally lower. Korea (EWY), which entered the descending trend in early May, is moving nicely lower after rallying sharply in the preceding week. Prepare to take advantage of the trend transitions by using the "Alert of imminent reversal list" below.
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.