Yesterday’s session was a tale of two markets, as stocks trended steadily lower in the morning, reversed at mid-day, then rallied back in a symmetrical pattern. In the end, the major indices averted sharp losses and finished near the flat line. The Nasdaq Composite, down 1.8% at its intraday low, finished with a closing gain of 0.3%. Both the S&P 500 and Dow Jones Industrial Average edged 0.1% higher. The small-cap Russell 2000 and S&P Midcap 400 indices rose 0.3% and 0.2% respectively. The main stock market indexes closed near the upper quarter of their intraday ranges.
Total volume in the NYSE eased 5%, while volume in the Nasdaq was 8% lighter than the previous day’s level. The relationship of lighter volume with slightly higher prices was not very significant. However, upon closer inspection, we noted turnover was lighter during the morning decline, then picked up during the afternoon reversal. This pattern was positive, as it hinted at diminishing selling pressure and stealth accumulation near the lows. Nevertheless, the market still needs to register a convincing day of higher volume gains in order to confirm the return of, or at least the start of, institutional buying interest.
In yesterday’s commentary, we annotated two charts to illustrate the potential buy setup in iShares Silver Trust (SLV), which has started showing relative strength to SPDR Gold Trust (GLD). Since SLV had just broken out above major resistance of its weekly downtrend line, our initial plan was to buy SLV on a very slight rally back above its December 2009 high ($19.11), but that didn’t happen in yesterday’s session. Instead, SLV declined 2%, closing right at support of last week’s breakout level. This now presents us with a more ideal entry price on a pullback, rather than as a continuation of the breakout. Yesterday’s pullback to support of the breakout level is shown on the daily chart of SLV below:
With new support of both the recent breakout level and the 20-day exponential moving average just below the current price of SLV, we are now presented with a more positive reward-risk ratio for buy entry. In fact, we generally prefer buying most commodity ETFs on pullbacks, rather than breakouts, because these types of ETFs commonly undergo price “shakeouts” that are easier to withstand if a lower entry price is obtained. Therefore, going into today’s session, we plan to buy SLV near its current price. Regular subscribers to The Wagner Daily should note our detailed trigger, stop, and target prices under “Today’s Watchlist” below.
U.S. Natural Gas Fund (UNG) was another buy setup we’ve been discussing over the past few days. Yesterday, UNG demonstrated constructive price consolidation above its 50-day MA, and came within a few cents of our buy entry point. In today’s pre-market session, natural gas futures are trading more than 1% higher. If that strength continues into today’s open, UNG will gap above horizontal price resistance of its lengthy base of consolidation, thereby triggering our buy entry point. Our buy point is shown on the daily chart of UNG below:
After the higher volume losses in the broad market on May 14, we said in yesterday’s commentary, “When higher volume losses occur near the top of a range, it is a bearish “distribution day” that warns of institutional selling, which often precedes substantial corrections in the broad market. However, when higher volume losses occur after the broad market has already been in correction mode for a significant period of time, it is sometimes positive because it could be indicative of climactic selling. Obviously, this doesn’t mean stocks will not ultimately go lower, perhaps even retesting the May 6 lows, but it does tell us that near-term selling pressure may soon dwindle.” The v-shaped price action that followed in yesterday’s session was in line with this analysis, as we saw both a significant retracement of the May 6 range, as well as buying interest that followed.
The broad market’s next move may be an attempt to follow through on yesterday’s bullish intraday reversal. If it does so on higher volume, it will surely catch our attention. Nevertheless, major overhead supply still remains, as well as resistance of the 20 and 50-day moving averages. With volatility still running high and stocks undergoing erratic, indecisive price action, traders might still consider a heavy cash position to be wise. In line with recent market sentiment, we are holding two short positions, but now we’re also planning to enter one to two new long positions (UNG and/or SLV) today.
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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 deron@morpheustrading.com.
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