Broad Market Analysis - Software relative strength, Utilities relative weakness
The broad market posted modest gains yesterday, but lower turnover across the board tempered the advance. The major indices moved in a non-committal, sideways range in the first half of the day, then grinded a bit higher in the afternoon before finishing in the upper third of their intraday ranges. The S&P 500, Nasdaq Composite, and Dow Jones Industrial Average each rallied 0.2%, while the small-cap Russell 2000 and S&P Midcap 400 indices both edged 0.1% higher.
Volume in both exchanges declined for the third straight day, enabling the S&P and Nasdaq to dodge a bearish "distribution day" last Friday, but also preventing yesterday from becoming a bullish "accumulation day." Total volume in the NYSE declined by 9%, while volume in the Nasdaq was 8% lighter than the previous day's level. Market internals were positive, but only by a narrow margin. Both the NYSE and Nasdaq saw advancing volume exceed declining volume by a ratio of approximately 3 to 2. Overall volume levels have been drifting lower every day since the initial surge on the first trading day of the new year, but has remained above average levels in each session. With quarterly corporate earnings season starting this week, many traders have likely taken a "wait and see" stance ahead of the plethora of reports on tap in the coming weeks.
Yesterday's action has no substantial effect on the technical picture of the broad market. Both the Russell 2000 and S&P Midcap 400 indices remain below their 50-day MAs, a negative for the overall stock market, but tech strength is enabling the Nasdaq Composite to hold just above both its 20 and 50-day MAs. The S&P 500 and Dow Jones are basically in "no man's land," stuck in the middle of their recent trading ranges. Rather than rehashing the same broad market support and resistance levels we looked at in yesterday's newsletter, let's take a brief look at which specific industry sector ETFs are showing the most relative strength and weakness to the major indices. Buying the sectors with relative strength and/or selling short those with relative weakness is a great way to both increase your chances of profitability and decrease the odds of churning your account in this indecisive market.
Only a couple of the sector ETFs we follow are showing decent chart patterns and relative strength. The Software HOLDR (SWH), which we brought to your attention last Friday, closed right at the high of its three-month base of consolidation. Any further strength in the Nasdaq today should cause the ETF to break out to a new four-year high:
Within the technology arena, the Computer Networking sector has also been acting well, enabling the PowerShares Networking (PXQ) to break out of an eight-week base of consolidation:
As long as PXQ holds above its prior high, which is new support at the $18 level, it presents a low-risk entry on the long side. Both the Software and Computer Networking segments are showing cleaner chart patterns and more relative strength than other tech segments such as Semiconductors or Internets. The Semiconductor Index ($SOX), for example, remains a chop-fest. Given that the stock market is not exactly strong right now, "cherry picking" only the best looking setups on the long side is essential.
As for the S&P and Dow-type sectors, the only ETF we see attempting to break out to a new high is the StreetTRACKS Capital Markets (KCE), which tracks the performance of the Securities Broker-Dealer sector:
On the short-side, both the oil and oil service sectors are perhaps the weakest right now. However, the ETFs such as the Oil Service HOLDR (OIH) and S&P Select Energy SPDR (XLE) have already fallen too far to provide an ideal entry point. Instead, we are waiting for decent bounces into resistance that would provide better risk/reward ratios. We also like the recent reversal in the DJ Utilities Average ($DJU), which is reflected on the daily chart of the Utilities HOLDR (UTH) below. We may initiate a new short position in UTH on any strength:
Finally, we like the relative weakness in the iShares DJ Real Estate Index Trust (IYR), which has been unable to stay above its 50-day MA. After moving back above its 50-MA on December 27, it remained above it for only five days before rolling back over. A break below the December 22 low of 81.69 will confirm the break of the 50-MA by setting a "lower low," while the 20-MA now acts as overhead resistance:
Though we showed you some of the ETF chart patterns we like for both long and short entry, now is NOT the time to go crazy with a bunch of new trade entries. A choppy and indecisive market is bad enough, but the upcoming slew of earnings reports could add to the market's erratic behavior. Again, "cherry picking" and a reduction in your share size for new trade entries is prudent.
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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:
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 plenty of trend reversal activity last week, and more is expected in the weeks ahead. If you have been following our ETF Trend Tracker commentary over the past weeks, you should have been prepared for some of the more imminent reversals. Starting with the "Market Segment" ETFs, both the S&P 500 index (SPY) and the S&P 500 growth index (IVW) fell to the "descending trend" lists. The Dow 30 (DIA) is likely to be next. For the "Industry Sectors," Basic Materials (XLB) and Oil Services (OIH) both fell apart. Specialty ETFs of Commodities (DBC), Gold (GLD), and Silver (SLV) all weakened significantly. DBC took the biggest hit, dropping 3% since our short entry trigger. Crude Oil trended much lower, which should be reflected in the fuel pumps this week. On the upside, we observed Biotech (BBH) and Healthcare (XLV) moving higher, but they lack support to continue this recent rally. Please review the current ETF Trend Tracker charts by clicking on the ticker symbols for additional comments about chart formation developments.
The bond market was a little choppy last week, but bounced higher to close the week. The reversal stops on the fixed-income ETFs have been placed very close the current prices, so any sudden episodes of weakness will trigger a reversal.
Internationally, Brazil (EWZ) and Korea (EWY) both dropped into the "descending trend" list. Be on the lookout for other countries to follow if the bearish domestic environment continues in the coming week. The best opportunities for trading profits are currently found on the short side of the stock market.
Alerts of imminent reversal to the Upside: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.