Stocks broke their five-day winning streak last Friday, as a tight, range-bound session caused the major indices to close the day slightly lower. The S&P 500 edged 0.1% lower, while both the Nasdaq Composite and Dow Jones Industrial Average slipped 0.2%. Although the small-cap Russell 2000 lost 0.2%, the S&P Midcap 400 eked out a nominal gain of 0.1%. Most of the main stock market indexes settled near the middle of their intraday ranges, which doesn’t mean much considering the trading ranges were so narrow. For the week, the Nasdaq advanced 3.1%, the S&P 2.6%, and the Dow 1.7%. All the major indices closed the week at fresh 2009 highs.
Turnover eased across the board, enabling the S&P and Nasdaq to avert a bearish “distribution day.” Total volume in the NYSE declined 13%, while volume in the Nasdaq was 5% lighter than the previous day’s level. Still, volume in both exchanges exceeded 50-day average levels. Turnover was greater than average in every day of the holiday-shortened week. The advancing/declining volume ratio in both exchanges was only fractionally negative.
Although most energy stocks were little changed last Friday, the crude oil commodity sold off sharply. Tumbling 4.2%, the U.S. Oil Fund (USO) fell back below its 20 and 50-day moving averages. Now, the ETF is breaking down below support of its five-month uptrend line. This is shown on the daily chart of USO below:
If USO slices through support of both its August 17 and September 2 lows (as marked by the dotted horizontal line), such a move would confirm the break of key trendline support shown on the chart above. If that happens, substantial downside momentum would likely follow. A realistic downside target would be a 50% to 61.8% Fibonacci retracement from the February 2009 low to June 2009 high. That equates to the $29.25 to $31.50 area (the July 2009 low correlates to a 50% retracement). As an alternative to selling short a potential breakdown in USO, one might consider buying the inversely correlated PowerShares Crude Oil Double Short (DTO) if/when USO breaks support. However, as with many (not all) of the leveraged “short ETFs,” remember they’re most ideal for short-term trading. Their relative performance to the underlying indexes can decline over longer time frames.
While the U.S. Natural Gas Fund (UNG) continues to linger near its 52-week low, First Trust Natural Gas (FCG) sprung to life in a big way last week. Whereas UNG is designed to follow the movement of the natural gas commodity futures, FCG is instead comprised of individual stocks engaged in exploration and production of natural gas. Unlike other energy ETFs such as S&P Oil and Gas SPDR (XOP) and iShares Oil and Gas (IEO), both of which include oil and gas stocks, FCG is a “pure play” ETF comprised exclusively of natural gas stocks. Lately, the natural gas stocks have begun to outperform oil stocks by a considerable margin. Last Friday, for example, FCG gained 2.1%. Comparatively, both XOP and IEO advanced only 0.6%. Moreover, volume in FCG surged sharply higher throughout last week’s breakout above resistance. This is shown on the daily chart of FCG below:
In each of the past five days, as FCG has cruised higher, notice how volume has correspondingly been trending higher as well. This hints at institutional accumulation. Volume in last Friday’s session alone was quite impressive; turnover surged to 700% greater than its average daily level. For whatever reason (which is actually irrelevant), funds are clearly flowing into FCG. After a 13% gain last week, the reward/risk ratio of buying FCG right now is not very positive. However, if FCG pulls back to near its breakout level (around $15.25 to $15.50), it would present a more attractive buy entry. Alternatively, a “bull flag” may form over the next few days. If it does, we would consider buying the breakout above the upper channel of the “bull flag” pattern.
As for the broad market, all the major indices closed last week at fresh highs for 2009. The pullback of the previous week now marks new “swing lows” for the main stock market indexes. Since those “swing lows” were higher than the previous lows of mid-August, the bullish trend is technically still valid. In the event of a retracement in the coming week, those “swing lows” of September 2 and 3 will come into play as key levels of short-term support. If stocks pull back within the next few days, they will first run into support of their 20-day exponential moving averages. However, the major indices would also be in danger of failing last week’s breakouts. As suggested last week, be careful to avoid complacency with new and current positions. The biggest moves in the market frequently come when the least number of participants expect them.
Open ETF positions:
Long – DGP, IBB, DXD (a “short ETF”)
Short – FXI, RKH
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.
