The major indices followed up Monday's strong rally with an acceptable session of quiet price action. After a range-bound session of trading, stocks closed lower across the board, but only gave back a relatively small portion of the previous day's gains. The Dow Jones Industrial Average eased 0.4%, as both the S&P 500 and Nasdaq Composite dipped 0.5%. The small-cap Russell 2000 and S&P Midcap 400 indices gave back 0.9% and 0.8% respectively. The main stock market indexes closed near the middle of their intraday ranges, indicating neither the bulls or bears assumed control into the close.
Total volume in the NYSE was 1% lighter than the previous day's level, but turnover in the Nasdaq ticked 2% higher. The higher volume loss in the Nasdaq technically caused the index to register a bearish "distribution day." However, volume was only marginally greater, intraday price action was more indicative of normal consolidation, and leading stocks held up pretty well. Trading in the Nasdaq also remained below its 50-day average level. In the NYSE, declining volume exceeded advancing volume by a margin of 5 to 2. The Nasdaq adv/dec volume ratio was negative by approximately 3 to 1.
On Monday, August 2, PowerShares Agriculture Fund (NYSEARCA:DBA) hit our price target of $26.20, prompting us to sell the position into strength, netting a gain of more than 8% on the trade. The timing of the sale may have been ideal, as DBA subsequently drifted lower throughout the rest of the day, and moved lower in yesterday's session as well. Since selling DBA for a nice gain, a few subscribers e-mailed us, asking us to explain the rationale behind how we determined our target price, providing a guideline on where to take profits. As such, let's walk through an educational explanation of the trade, including both the reasoning for our original entry price, and the rather basic determination for setting our approximate target price. Below is a daily chart of DBA:
Our initial June 30 entry into DBA (labeled as "A" on the chart) was based on an "undercut" of the preceding trading range, as well as the 50-day moving average. When DBA sold off sharply on June 29, breaking below an obvious level of horizontal and moving average price support, it caused the "weak hands" to quickly abandon their long positions in fear of further weakness. However, the following day, DBA immediately surged higher, rallying to close above the previous day's high, and back at the 50-day MA and lows of the prior price consolidation. When this situation occurs, it normally presents an ideal buy entry point, as much of the overhead supply has already been absorbed by traders and investors who just sold the previous day. Furthermore, those same individuals subsequently buy back into the ETF, in fear of missing the upside move they were initially anticipating. This, of course, adds to the bullish momentum, driving the ETF higher in a short period of time. Therefore, we bought DBA on June 30, just above the previous day's high, then added additional shares to the position a few days later.
The upside target price was simply based on resistance of prior highs. Such levels of horizontal price resistance are often overlooked by beginning traders, who eventually discover their importance. At the time of entry, we saw significant resistance at the $25 level, formed by the highs of mid-March and April. However, given the relative strength and "higher highs" and "higher lows" DBA was forming, we reasoned bullish momentum would likely carry the ETF beyond that level of resistance in the weeks that followed. We therefore looked for the next area of resistance from prior highs, which was the February 16 high of $25.90. Just as stocks and ETFs frequently "undercut" obvious levels of support before reversing higher, the same is true on the upside, meaning they will often "overcut" resistance levels before pulling back. With a target price of $26.20, just thirty cents above the February 16 high, that's what we were expecting to happen with DBA. On Monday, DBA gapped higher, opening right at the target price we sold into (labeled as "B" on the chart), then promptly pulled back below the $25.90 area of resistance. Now, DBA remains on our watchlist as a strong ETF to consider for re-entry on a pullback. We'd like to see a retracement to the $25.10 to $25.20 area, where major support of the 20-day exponential moving average, 200-day moving average, and the April highs all converge to form a low-risk buy point.
Yesterday, Market Vectors Indonesia (NYSEARCA:IDX), a strong international ETF that has been on our pullback watch list for the past several weeks, tumbled approximately 4%. But even though the one-day price performance was negative, IDX is now "undercutting" short-term support of its 20-day exponential moving average, and is right at support of its prior breakout level. This is shown on the daily chart of IDX below:
As DBA did in late-June, IDX is now setting up for potential "undercut" entry, which would trigger on a rally above the August 3 high. With IDX still trading just shy of its all-time high, and at key support of the recent breakout level, the ETF obviously has major relative strength to the main American stock market indexes. If it convincingly rallies above yesterday's high in today's session, we plan to buy it. Regular subscribers should note our detailed trigger, stop, and target prices in "Today's Watchlist" below. As always, it's important to not "jump the gun" with a premature buy entry ahead of IDX actually moving back above the August 3 high. Our "undercut" buy entry is only validated when an immediate recovery back above the previous day's high occurs.
Open ETF positions: |
Long - TAN, TLT, UNG, UUP
Short (including inversely correlated "short ETFs") - GDX
Deron Wagner is the Founder and Head Portfolio Manager of Morpheus Trading Group, a capital management and trader education firm launched in 2001. Wagner is the author of the best-selling book, Trading ETFs: Gaining An Edge With Technical Analysis (Bloomberg Press, August 2008), and also appears in the popular DVD video, Sector Trading Strategies (Marketplace Books, June 2002). He is also co-author of both The Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader (McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and Yahoo! FinanceVision. Wagner is a frequent guest speaker at various trading and financial conferences around the world, and can be reached by sending e-mail to firstname.lastname@example.org.
DISCLAIMER: There is a risk for substantial losses trading securities and commodities. This material is for information purposes only and should not be construed as an offer or solicitation of an offer to buy or sell any securities. Morpheus Trading, LLC (hereinafter "The Company") is not a licensed broker, broker-dealer, market maker, investment banker, investment advisor, analyst or underwriter. This discussion contains forward-looking statements that involve risks and uncertainties. A stock's actual results could differ materially from descriptions given. The companies discussed in this report have not approved any statements made by The Company. Please consult a broker or financial planner before purchasing or selling any securities discussed in The Wagner Daily (hereinafter "The Newsletter"). The Company has not been compensated by any of the companies listed herein, or by their affiliates, agents, officers or employees for the preparation and distribution of any materials in The Newsletter. The Company and/or its affiliates, officers, directors and employees may or may not buy, sell or have positions in the securities discussed in The Newsletter and may profit in the event the shares of the companies discussed in The Newsletter rise or fall in value. Past performance never guarantees future results.
Charts created by TradeStation (tradestation.com).
© 2002-2010 Morpheus Trading, LLC
Reproduction without permission is strictly prohibited.
Disclosure: Long TAN, Long TLT, Long UNG, Long UUP, Short GDX