Broad Market Analysis - Oil Service ETF breaks out
Yesterday's session was a roller coaster ride, but stocks finished with solid gains that enabled the major indices to erase most or all of Monday's losses. After beginning the day with an opening gap up, the market rallied throughout the morning session, but a wave of selling hit the market at mid-day. The sell-off caused the Nasdaq to reverse and briefly drop to the previous day's close, but the bulls pushed stocks back towards their highs in the final ninety minutes of trading. The S&P 500 rallied 0.9%, the Nasdaq Composite 0.8%, and the Dow Jones Industrial Average 0.7%. Both the small-cap Russell 2000 and S&P Midcap 400 indices snapped back with gains of 1.2%. Overall, it was a volatile intraday tug-of-war, but the bulls finished with the upper hand. Each of the major indices also finished near their best levels of the day, but were unable to overcome resistance of their morning highs.
The one thing lacking from yesterday's session of broad-based gains was higher turnover. Total volume in the NYSE ticked higher by only 1%, while volume in the Nasdaq was 3% lighter than the previous day's level. If the gains would have occurred on firmly higher volume, it would have indicated accumulation of stocks by institutions such as mutual, hedge, and pension funds. Instead, it appears that institutional traders were not in a hurry to jump back into the market after Monday's sharp correction. Since more than half of the market's average daily volume results from institutional trading activity, rallies are rarely sustainable when they are backed largely by retail investors instead of institutions., This is especially true of rallies that follow a sharp correction such as the one we saw on Monday.
The real action yesterday was in the oil and oil services sectors. Crude oil convincingly broke out to over $60 per barrel, enabling the U.S. Oil Fund (USO) to finally move above its two-month downtrend line and close above its 50-day moving average for the first time since August 11:
As is typical, the strength in crude oil triggered strong rallies in both the Oil ($XOI) and Oil Services ($OSX) sectors as well. Of all the major sectors we track on a daily basis, the $OSX index netted the largest gain yesterday by surging 4.0% higher. This pleased us because it enabled our corresponding long position in the Oil Service HOLDR (OIH) to advance 3.8%. More importantly, the technical pattern of OIH now looks pretty bullish:
The 200-day moving average acted as a brick wall, as if often does, that stopped the numerous attempts for OIH to break out over the past three weeks. But yesterday, it finally blasted through the 200-MA. The more difficulty a stock or ETF has in breaking out above a resistance level, the more momentum the subsequent breakout will have. Therefore, OIH should be good for further upside in the short-term. Presently, our position in OIH is showing an unrealized gain of nearly five points, but it is only half way to our price target, which is just below the prior high of $150 that was set on August 2. If you missed the initial entry, any pullback to near the 200-day MA is an ideal place to buy because that moving average should now provide very strong price support. We also bought several individual oil and gas stocks in The MTG Stalk Sheet, each of which are also breaking out of bases of consolidation.
One sector that has begun to look pretty bearish lately is the Banking Index ($BKX):
As you can see, the $BKX broke down below support of its 50-day moving average a few days ago, after failing to hold in a tight pattern of consolidation. Over the past two days, it has bounced with the broad market, but now has a lot of overhead supply to contend with. We therefore view the rally into the 50-MA and prior consolidation as a low-risk entry point to initiate a new short sale entry in the sector. There are numerous ETFs correlated to the financial sectors, but a complete list can be found on the free Morpheus ETF Roundup. Of them, we feel the Regional Bank HOLDR (RKH) has one of the best chart patterns for short entry. Regular subscribers will see our trigger, stop, and target price on RKH below. The streeTRACKS Capital Markets (KCE), which tracks securities broker-dealers, also looks pretty good for short selling because its last breakout appears to be failing.
Despite the lack of high volume confirmation, it was bullish that the S&P 500 managed to recover all of its November 27 loss over the past two sessions and has moved back above its primary uptrend line. Stocks are giving some mixed signals now, so caution is in order on both sides of the market. Due to the minimal overhead supply, the major indices to once again rip to new highs, but they could just as easily roll over and resume Monday's correction. Rather than trying to predict which way the market will go next, we are simply positioning ourselves on both sides of the market by attempting to buy the sectors with the most relative strength and best chart patterns, while selling short the inverse. Remember to trade what you see, not what you think!
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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:
Last week's Stalk of the Week, AEM long, triggered and worked out nicely. We sold into strength for a solid gain of more than two 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:There was some nice action in the industry sectors, despite a shortened trading week. M&A activity provided a major boost to Real Estate (IYR) , which gapped sharply on Monday, then closed the week at its high. Other ETFs making nice moves within their trends are: Internets (HHH), Basic Materials (XLB), Wireless (WMH), IPOs (FPX), and Silver (SLV). Reversing to the upside were Gold (GLD) and the Euro Currency (FXE). As discussed extensively in The Wagner Daily over the past week, GLD has been showing a lot of relative strength and will trigger to the ascending trend on Monday's open. We will then adjust the trigger price with the actual opening price.
Again, none of the broad-based Market Segment ETFs changed the direction of their trends. We like our placement of the stops for the coming week's trading as well. Bonds were quiet, but we adjusted some MTG Stops (S1) to fine tune our position.
International ETFs showed the most action. Adding to their gains within their trends were: Emerging Markets (EEM), Germany (EWG), Hong Kong (EWH), Singapore (EWS), Malaysia (EWM), Taiwan (EWT), Korea (EWY), China (FXI), and Europe (FEZ). China, Singapore and Malaysia are accelerating higher, so we are a little more concerned about our exposure to risk. It's a balancing act between allowing enough wiggle room, but at the same time securing our gains. We are watching our stops carefully with regard to price scale and relative strength. It may seem, for example, that our MTG Stop on China (FXI) is too tight, but it is actually over 4% away from its last closing price.
On the downside, Japan (EWJ) plunged lower, gapping below our Reversal Stop. EWJ has been in a relatively wide range-bound pattern for several months, so it may not have a very reliable nor lucrative long-term trading target at the moment. Please read additional technical comments for each ETF's annotated chart by clicking on any ticker symbol in the ETF Trend Tracker report.
Alerts of imminent reversal to the upside are:
DBC, SHYClick 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.