Broad Market Analysis - Gold breaks out, Semis break down
After two days of indecision and mostly unchanged prices, the major indices followed through on the broad-based correction that began on October 27. The Nasdaq Composite plummeted 1.4%, the S&P 500 lost 0.7%, and the Dow Jones Industrial Average declined 0.4%. The S&P Midcap 400 fell 1.2%, while the small-cap Russell 2000 suffered a 1.9% loss. After trending steadily lower throughout the entire session, each of the indices also closed near their intraday lows.
Overall volume rose in both exchanges yesterday, causing both the S&P and Nasdaq to register bearish "distribution days." Both the NYSE and Nasdaq saw 3% volume increases over the previous day's levels. In the Nasdaq, it was the fourth day of higher volume losses within the past month and the third such "distribution day" in the S&P during the same period. As you may recall, we labeled the October 31 price to volume action as bearish "churning" and suggested it was a warning sign to the bulls. Therefore, it was not a big shock that yesterday was a "distribution day" in both exchanges. Market internals were pretty ugly yesterday. The Nasdaq advancing volume to declining volume ratio was negative by a margin of nearly 5 to 1. In the NYSE, declining volume exceeded advancing volume by approximately 7 to 2.
The StreetTRACKS Gold Trust (GLD) bucked the trend of the broad market by zooming 2% higher yesterday. More importantly, the rally confirmed its recent breakout above several key resistance levels:
Looking at the chart above, notice how GLD has closed firmly above resistance of its prior downtrend line that had been in place for five months (the descending purple line). The breakout also coincided with a move above both its 200-day moving average (the orange line) and prior high from September 28. In the October 25 issue of The Wagner Daily, we illustrated how GLD was forming a bullish chart pattern known as an inverse "head and shoulders." We subsequently bought a half position of GLD in that day's session, then added to it on October 30. So far, GLD is showing an unrealized gain of two points (3.6%) and should continue to move higher in the intermediate-term. With both an inverse and a regular "head and shoulders" pattern, the predicted price target is equal to the distance from the top of the "head" to the "neckline." In this case, the top of the "head" is 55.55 and the "neckline" is right around 60 (the dashed blue line). Therefore, a realistic upside price target is the 64.50 area (4.5 points above the neckline at 60). In the short-term, GLD may correct a bit lower, but all the prior resistance levels it just broke out above should now act as the new support levels.
The Semiconductor Index ($SOX), which has been in a choppy, sideways range for the past several days, resolved itself to the downside yesterday. We sold short the Semiconductor HOLDR (SMH) on October 27 after it began to come back down from a "lower high" that had formed below resistance of the 200-day moving average. Yesterday, SMH closed right at the intraday low of October 27 and closed only two cents above a major level of horizontal price support:
Any further weakness in the $SOX today should cause SMH to fall below the horizontal support illustrated above. If that happens, it will undoubtedly weigh on the Nasdaq, and hence the entire broad market. We are prepared to capitalize on such a move with our SMH short position that is presently showing a 1.9% gain.
Yesterday morning, we mentioned that the major indices could no longer be labeled "overbought," but that further downside could easily still occur. Yesterday's losses pulled the S&P back down to support of its 20-day moving average, while the Nasdaq Composite closed just below it. Since the current uptrend began back in July, the 20-day moving average has perfectly acted as support from which the major indices subsequently continued their primary uptrends. As such, we will be closely monitoring the price action and volume patterns of the market over the next several days in order to determine if this will be the case once again.
Looking purely at the daily charts, one could easily surmise that the current correction down to the 20-day moving averages in the S&P and Nasdaq is no different than others over the past several months. But there is one crucial, yet easily overlooked difference this time -- poor performance of leading stocks. In a healthy market, leading growth stocks will show relative strength by retracing a smaller percentage than the broad market on the down days. However, since the correction began on October 27, we have seen many leading stocks such as Hittite Microwave (HITT) and Garmin (GRMN) completely fall apart. Further, there have been many failed breakouts to new highs as well. Clearly, these are not good signs, so we are against buying new long positions right now until this scenario changes. Remember, though, that commodity and currency ETFs are not directly tied to the stock market's performance.
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.
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, CELG long, triggered and worked out well. We sold it into the opening gap of October 31 for a gain of approximately 5 points.
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:Several ETFs posted new highs last week, so we lifted our "MTG Stops (S1)" higher to lock in more gains. Some stops were moved more aggressively than others due to bearish topping patterns, as well as an apparent start to a broad-based correction. Please review the detailed commentary we have annotated on all the charts (just click on the ticker symbol). Even most of ETFs that are not highlighted with changes to their stop prices this week have been updated with new technical commentary.
The two sectors in the descending trend from last week (SMH and BDH) are both doing well on the downside, with BDH showing a bit more weakness. On the upside, Internets (HHH), Telecom (IYZ), Nanotechnology (PXN), Consumer Staples (XLP), Consumer Discretionary (XLY), Gold (GLD), and IPOs (FPX) each put in impressive performances. Although GLD remains on our "descending trend" list, we anticipate a short-term, momentum-driven rally if it clears the $60 area. As we have been discussing in The Wagner Daily, GLD is in the process of completing an inverse "head and shoulders," a bullish chart pattern that should enable GLD to break out of its five-month downtrend.
The fixed-income (bond) ETFs were rather volatile last week, causing the long term T-bond (TLT) to move to the "descending trend" list early in the week. However, there was a general rotation of funds into the bond market in the latter half of the week. For now, you may consider avoiding the bond ETFs because they are a bit choppy and indecisive.
Internationally, most markets rallied firmly, and several ended the week near their new highs. Over the past few months, we have noticed several instances in which the specialist has clearly failed to control the opening prints in iShares Hong Kong (EWH), resulting in many traders' stops getting triggered without valid cause. Because of this erratic behavior, we are considering delisting EWH from our ETF Trend Tracker. If we do, which international ETF would you like to see replace EWH . . . or shall we keep EWH? This is an opportunity for you, the subscriber, to let us know which ETFs you would like us to follow. Previously, EWH was the only ETF that represented China, but the iShares China (FXI) may become our new benchmark/proxy for that region.
All the ETFs on the "ascending trend" list are in the green (black if you prefer), which is not a bad batting average. The ones one the "descending list" are generally not doing as well, but it only takes one big winner to make up for a few ill-performing ones. To reiterate, we are now stalking for new bearish reversals to find leadership (relative weakness) to the downside.
Alerts of imminent reversal to the upside: FXE
Alerts of imminent reversal to the downside: SHY, IEF, EWH
Click 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.