After opening near the flat line, stocks headed south throughout the morning session, at one point undercutting support of their previous day’s lows. As we’ve frequently seen in recent weeks, the major indices reversed course in the afternoon, but this time the market was unable to finish in the plus column. The S&P 500, down 1.1% at its intraday low, closed 0.3% lower. The Dow Jones Industrial Average lost 0.4% and the Nasdaq Composite fell 0.9%. The small-cap Russell 2000 and S&P Midcap 400 indices declined 0.8% and 0.3% respectively. The Nasdaq Composite settled near the bottom third of the day’s range, but the S&P and Dow closed above the middle of their intraday ranges.
More notable than the relatively modest price declines was the higher volume that accompanied yesterday’s losses. Total volume in the NYSE swelled 23%, while volume in the Nasdaq increased 5% above the previous day’s level. The losses on higher volume caused both the S&P 500 and Nasdaq Composite to register a bearish “distribution day,” the first clear instance of institutional selling in quite a while. Nevertheless, market internals were not that bad. In the NYSE, advancing volume actually exceeded declining volume by nearly 2 to 1. The Nasdaq adv/dec volume ratio was negative, but only by a ratio of 2 to 1.
Yesterday, we added another commodity ETF to our portfolio, with the purchase of PowerShares Oil Fund (DBO). Over the past week, we had been monitoring crude oil for a potential buy entry, patiently waiting for a low-risk entry price. Our trigger for buy entry came when DBO broke out above resistance of its June 2009 high. But a more important technical factor that prompted our buy entry was the formation of an “inverse head and shoulders,” a bullish pattern that’s the opposite of the standard “head and shoulders” top. The components of this inverse head and shoulders are labeled on the daily chart of DBO below (the usual moving averages have been removed in order to more easily see the pattern):
The breakout above the “neckline” actually occurred on August 3. However, because resistance of the June 2009 highs was just above that level, we decided to play it cautiously by waiting for confirmation of that breakout before buying DBO. That move occurred yesterday, which prompted us to buy DBO. Intraday price action was solid, and DBO closed near yesterday’s high. Further, notice that volume surged to approximately three times its average daily level of 319k shares. This indicates institutional accumulation as well.
When trading the crude oil commodity in the past, we’ve primarily bought and sold the more popular U.S. Oil Fund (USO). However, we bought DBO instead because we observed that USO has been showing slight relative weakness to DBO. Whereas DBO has already broken out above its June high, USO is still nearly 5% below its June high. Although both ETFs are designed to follow the price of the crude oil commodity futures contracts, the manner in which their underlying derivatives formulate the prices of the ETFs is different. Without getting into lots of technical details, suffice it to say DBO has been marginally outperforming the price of the actual Crude Oil Continuous Contract (@QM). As for the other crude oil ETFs, both ProShares Ultra Crude (UCO) and iPath Crude ETN (OIL) closely resemble the chart of USO. Conversely, the leveraged PowerShares Crude Oil Double Long (DXO) has the same pattern as DBO, but we opted for the non-leveraged flavor instead.
Immediately after the close of yesterday’s trading, computer networking giant Cisco Systems (CSCO) fell nearly 4% after the release of their latest quarterly earnings. Not surprisingly, this negatively affected the Nasdaq futures, which fell to the lows of the regular session. IF the negativity persists into today’s open, the Nasdaq will be poised to open below yesterday’s low, as well as its 10-day MA. If that happens, and the stock market fails to quickly snap back from the opening weakness, there is a good chance stocks could actually see a bit of downside follow-through for a change. This, of course, would not be a bad thing, as there are several ETFs we’ve been stalking for potential buy entry on a significant pullback. Nevertheless, we’ve been dealing with an incredibly resilient market, so we would certainly not rule out the possibility of stocks fending off any early weakness.
Open ETF positions:
Long – DGP, FXB, FXY, DBO
Short – (none)
NOTE: Regular subscribers to The Wagner Daily receive daily updates on the open positions above, as well as new ETF trade setups, including trigger, stop, and target prices. Intraday Trade Alerts are also sent via e-mail and/or mobile phone text message on as-needed basis.
Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (morpheustrading.com), which he launched in 2001. Wagner’s new book, Trading ETFs: Gaining An Edge With Technical Analysis, was published by Bloomberg Press in August, 2008. Wagner also appears on his best-selling video, Sector Trading Strategies (Marketplace Books, June 2002), and is 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. He is also a frequent guest speaker at various trading and financial conferences around the world.
For a free trial to the full version of The Wagner Daily above, which includes detailed ETF trade setups and daily position updates, or to learn about our other newsletters, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com.
