Broad Market Analysis - Sector rotation into commodity ETFs
The S&P 500 built on the gains from the previous day's breakout, but selling pressure late in the afternoon wiped out a majority of its intraday gain. As of 2:15 pm EST, the S&P 500 was trading 0.8% higher, but a negative reaction to the subsequent Fed Minutes triggered weakness that reduced its closing gain to only 0.2%. Both the Dow Jones Industrial Average and Nasdaq Composite followed similar intraday patterns before finishing higher by 0.3% and 0.5% respectively. Small-cap stocks continued to outperform, as the Russell 2000 Index cruised 0.9% higher. The S&P Midcap 400 advanced 0.6%. Each of the major indices closed near the middle of their intraday ranges.
Turnover in the Nasdaq was 6% higher than the previous day, enabling the index to register its third straight day of accumulation. Total volume in the NYSE, however, declined by less than 1%. Still, volume levels were healthy overall and firmly above their 50-day averages. Market internals were solid. In both exchanges, advancing volume exceeded declining volume by a ratio of approximately 2 to 1.
Yesterday, we entered a new long position in the PowerShares WilderHill Clean Energy (PBW). This ETF, which began showing strength when the Democratic party won control of the U.S. House of Representatives and Senate last week, is unique because it is comprised of a plethora of companies related to the development and production of alternative energy sources (click here to see the underlying stocks). The first thing that caught our attention was that PBW had just broken out above resistance of a six-month downtrend line. Even better, however, was that the breakout coincided with the formation of the right shoulder of a chart pattern known as an "inverse head and shoulders." As you may recall, this chart pattern was the original reason we began buying the StreetTRACKS Gold Trust (GLD) in late October, which we remain long with a substantial profit. We have illustrated the "inverse head and shoulders" pattern on the daily chart of PBW below. The blue descending line marks the prior downtrend, which should now act as the new support level. Also notice the volume increase over the past two weeks, which shows signs of institutional buying interest:
As for the details, we listed a predetermined trigger price for entry above 18.16. We arrived at this price because we wanted confirmation for PBW to first rally above resistance of its October 26 high of 18.09. PBW triggered on the open, then trended steadily higher throughout the day. If PBW clears its October 16 high of 18.43, three cents above yesterday's close, it should really begin to take off because that would represent a breakout above the "neckline" of the "inverse head and shoulders" pattern. GLD, for example, rallied four days in a row after breaking out above its "neckline" at the end of last month. To guard against a failed breakout, we have a protective stop on PBW just below the 50-day moving average, which is presently at 17.42. On the upside, it will initially run into significant resistance of its 200-day moving average around 19.13, but we have an ultimate target of 20.15. This target represents a 50% Fibonacci retracement of the entire downward move from the May high down to the September low.
In addition to PBW and GLD, we remain positioned long in the DB Commodity Index Trust (DBC) and short the iShares Cohen and Steers Realty Majors (ICF). DBC is basically unchanged from our original entry point, but we are noticing positive money flow and sector rotation back into commodities. We originally sold short ICF because the Real Estate Index ($DJR) appeared to be rolling over, but strength in the broad market is helping the sector to recover. ICF is near our stop just above yesterday's high, but we remain short for now. Finally, we re-entered the U.S. Oil Fund (USO) yesterday, when it rallied back above its three-day high and 20-day MA. Oil is sometimes an erratic and choppy sector to trade, but we still love the risk/reward of this setup. With this trade, our profit target (58.85) is nearly five times the amount of our risk (stop at 51.83). With the newfound strength in commodities, USO should easily be able to hold above its prior downtrend line.
Although the broad market locked in another session of gains yesterday, momentum from the weakness into the close may carry into today's session. But with the Nasdaq closing higher in seven of the past eight sessions, a modest price correction in that index would be neither surprising nor unwelcome. Conversely, the S&P 500 is less extended than the Nasdaq and much closer to lower channel support of its primary uptrend line. As such, new positions in the S&P and Dow-related sectors may provide you with a better risk/reward ratio than trying to buy the Nasdaq at current levels. Obviously, all bets are off with new long entries if either the S&P or Dow were to break support of their primary uptrend lines.
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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:
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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:The market segments trended generally higher and posted new highs last week. Several stops were adjusted higher, but you will notice that some stops have been strategically placed to avoid "Stop Hunts" at more "obvious" levels. We will be placing stops at various levels based on the current price action and the complexion of the industry. Depending on price action, we will place stops tighter or looser relative to the current price. The "Reversal Stop (S2)" usually lags far behind from the current price. But don't worry, we track each ETF constantly. Eventually, the price action will prompt us to adjust the S2 to a more assuring level. Consult each chart by clicking on the ticker symbols to understand how the stops are placed from week to week. You may want to look at the previous week's chart and compare it to the current week's chart.
In the Sector arena, Oil Services (OIH) and Energy (XLE) triggered reversals and are now on the "ascending trend" list. Internets (HHH) continued to stay strong and finished the week with a closing high. Real Estate (IYR) traded below the lower trend channel, but has moved back into the range so far. The "MTG Stop (S1)" seems to be in the proper place. The Pharmaceutical (PPH) and Healthcare (XLV) ETFs fell apart last week, hitting our MTG Stops (S1) along the way. Nevertheless, we still got out with a nice gain. Broadband (BDH) continues to trade lower on its "descending trend" list, closing in about 6% from mid-October.
The Short-term bonds (SHY) is now in the "descending trend" list. The bond market bias is neutral and, by looking at the price action, we may be stuck in a range-bound trading pattern for several months. This is to be expected due to a lack of interest rate movement. We will likely switch to analyzing weekly charts in the next report.
Internationally, Germany (EWG) is noticeably strong and very steady. In fact, Europe (FEZ) has been a steady climber since the reversal trigger late September. Emerging Markets (EEM) is also higher, but it seems to be more volatile. Several Asian country ETFs were moving very well again last week. Malaysia (EWM) and China (FXI) are both accelerating higher.
Alert indicating imminent reversal to the ascending trend:
FXE, SHY, TLTClick 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.