Broad Market Analysis - Biotech HOLDR breaking out
Stocks oscillated in a relatively narrow and choppy range before finishing yesterday flat to modestly higher. The major indices built on their recent gains in the morning session, but sellers arrived in the afternoon and reversed the early strength. A bounce during the final thirty minutes of trading lifted the indices off their intraday lows. The S&P 500 was unchanged, the Nasdaq Composite ticked 0.1% higher, and the Dow Jones Industrial Average gained 0.2%. Small and mid-cap stocks showed a bit of relative strength, as the Russell 2000 rallied 0.4% and the S&P Midcap 400 0.3%.
Total volume in both exchanges was 1% higher than the previous day's levels. Technically, the gains on higher volume gave the Nasdaq its third straight "accumulation day," but a 0.1% gain on 1% higher volume was hardly enough to label it a session of institutional buying. Because yesterday was basically a session of sideways consolidation, it actually would have been much better if volume had declined instead of increased. When stocks trade in a sideways holding pattern, lower volume is a healthy sign that the bulls are taking a break and the sellers are staying away as well. However, if volume increases without a corresponding rise in price gains, it often indicates "churning" that is indicative of institutional selling into strength. This did not seem to be the case yesterday, but it is something to be on guard against, especially if volume rises again today without any corresponding gains.
One ETF that just broke out of a long base of consolidation was the Biotech HOLDR (BBH), which surged 2.7% yesterday. We have not discussed BBH for many months because it has been in a choppy, sideways range since April of this year. But it busted through a major area of horizontal price resistance and its 200-day moving average yesterday. Looking at the daily chart below, notice how BBH finally broke out above the 182 level, an area that stopped previous rally attempts numerous times over the past six months:
The longer a stock or ETF has been in a sideways range, the more explosive the move will be when the break out eventually occurs. Therefore, we expect BBH to trend steadily higher over the next several weeks. For a low-risk entry point on the long side, we would either want to see a price retracement of about one-third of yesterday's range or a sideways consolidation for another day or two. If it consolidates, we would buy the first breakout above the high of the consolidation on an hourly chart. On the other hand, if it gaps up and immediately rallies today, we will not chase an entry on the long side. If we get a proper entry in BBH, our initial stop would be near yesterday's low, just below the 200-day MA. An initial target would be the $195 area, which equates to a 76.4% Fibonacci retracement of the entire move down from its all-time high.
The following regarding the S&P Midcap 400 appeared in yesterday morning's Wagner Daily. The index tried and failed to breakout since yesterday morning, but the setup and technical explanation remain valid. . . One index that is poised to make a big move in either direction is the S&P Midcap 400 Index ($MID). While the broad market has been rallying for the past two months, the $MID index has showed relative weakness by trading in a narrow, sideways range. Normally, such action would point to the potential for a selloff on the first broad market correction, but the tight consolidation could just as easily result in a high momentum snap to the upside. Looking at the daily chart of $MID below, notice how horizontal price resistance has clearly formed at the 757 level, but the index has been setting "higher lows" as well:
As you can see, the 200-day moving average resides at the 761 level, just a few points above the horizontal price resistance. While we would not buy any of the ETFs that track the S&P Midcap 400 until the index firmly closes above its 200-day moving average, such price action would represent a low risk entry on the long side. If the $MID pops to a new multi-month high above its 200-day MA, the pattern will attract buyers, which in turn will force the bears to cover any short positions. The end result would likely be a rapid upward move of at least several days. Conversely, it is just as much of a "no brainer" to sell short the $MID index if it breaks below the lower channel support at the 731 level. Obviously, we have no way of knowing for certain which direction the $MID index will break out, but a move out of its multi-month range in either direction should be good for a multi-day swing trade. We recommend setting alerts on your trading software for both a move above 761 and below 731. Then, rather than anticipating which direction it will resolve itself, you can simply react to the upside breakdown or downward breakdown. For now, however, we recommend avoiding the index until it figures out which direction it wants to go. The S&P Midcap SPDR (MDY) is the most popular ETF that mirrors the index, but you get more "bang for your buck" by trading the new leveraged ProShares ETFs instead. MVV is the ticker symbol for the ProShares Ultra MidCap 400, while MZZ is the ticker symbol for the UltraShort MidCap 400 ProShares. If the $MID index resolves itself to the downside, buying MZZ is much easier and requires less capital than selling short a comparable position in MDY.
As for the broad market, both the S&P and Dow have held at fresh multi-year highs for the past two days. The Dow is also less than one hundred points away from its all-time high. It certainly has made quite a stealth recovery off its July low. The biggest problem holding down the Nasdaq has been the relative weakness in the Semiconductor Index ($SOX), which became notable more than a week ago. Yesterday, for example, the $SOX lost 0.7% while the Nasdaq gained 0.1%. If the $SOX gets in gear, it could easily propel the Nasdaq back up to its 52-week high as well, but for now the index remains 5% below it. The new highs in the S&P and Dow are definitely devoid of any overhead supply that could act as resistance, but history has shown us that rallies that are not led by the Nasdaq are often short-lived. For that reason, our overall market bias remains mostly neutral in the short-term.
If you wish to learn about Morpheus Trading Group's ETF trade entries on the same day they occur, sign up for a free trial to The Wagner Daily or other MTG services by clicking here (limit one per household). Also, remember that all previously published issues of both The Wagner Daily and The Wagner Weekly are available in the MTG archives. If you are new to our services or wish to broaden your knowledge of ETF trading or our general trading style, we recommend you browse the archives because it is educational and free! Click here to visit the Wagner Daily archives or here to visit the Wagner Weekly archives.
Deron Wagner, the Founder of Morpheus Trading Group and Head Trader of the Morpheus Capital hedge fund, and daily contributor to TradingMarkets.com, will be sharing his extensive knowledge on how he uses exchange traded funds for trading various market sectors. In this seminar, Wagner will be expanding on techniques discussed each day in his Wagner Daily newsletter and the ETF Trend Tracker, as well as presenting completely updated information from his video, Sector Trading Strategies, and book, The Long-Term Day Trader.
The same workshop will be conducted in various cities around the country at the following locations and dates. Specific details of each location will be e-mailed upon your registration and seat reservation:
Each workshop will run from 1:00 pm - 3:30 pm on the following dates. Click on the location of your choice to register and reserve your seat:
You will learn how to. . .
If you really want to trade ETFs, but don't know where to start, be sure to attend the workshop at a city near you. Expand your trading opportunities well beyond the commonplace ETFs such as the S&P 500 SPDR (SPY) and the Nasdaq 100 (QQQQ) and you will reap the rewards. If you missed Wagner's recent seminar at the Ft. Lauderdale International Traders Expo. (pictured above), now is your chance to catch this special workshop again at a nominal cost of only $95! Please note that seating is limited and advance registration is required. Attendance available on a first-come, first-served basis.
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 setup is:
Last week's Stalk of the Week, COGO long, triggered and remains open. Presently, the trade is near our original entry point.
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 this week's updated ETF Trend Tracker that was e-mailed to subscribers. 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:Last week was marked with some volatility, but the broad market ended slightly lower. We feel the markets have reached a critical "make it or break it" level, as the S&P 500 (SPY) is testing its 52-week high from last May. Many traders are watching this level to see if it the S&P is able to convincingly break out. We'll keep a close watch on this level in the coming week. As discussed in today's Wagner Daily, the fixed- income ETFs are reacting positively in the current environment and closed higher last week. Many of them broke out above their primary downtrend lines.
There were not many ETFs that changed the direction of their trends last week, but a few industries weakened enough to be in danger of breaking below support of their ascending trend channels. Industries at the lower end of their trend channels are Internets (HHH) and Semiconductors (SMH). When ETFs break their trend channels, especially after several weeks moving in the trend direction with the Reversal Stops trailing far behind, it is a good time to reduce position size. Some traders will often sell short the first break of a trend channel, which greatly reduces our benefit of staying long all the way down to the Reversal Stop (S2). Consider using the more conservative MTG Stop (S1) instead.
Several industries are near the upper channels of their ascending trends. They are:
Telecoms, IYZWith new investment capital, you simply want to be long the ETFs with the most relative strength to the broad market and/or short those with the most relative weakness.
Mexico (EWW) was the only ETF reversing to the descending trend last week. We have tightened several MTG Stops in the updated ETF Trend Tracker report. Additionally, we urge you to review the ETF charts by clicking on the ticker symbols for supplemental comments and evaluations.
Alerts for ETFs about to reverse to the ascending trend:
FEZAlerts for ETFs about to reverse to the descending trend:
DIAClick 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.