Broad Market Analysis - Gold and Biotechs breaking out!
After brushing off initial opening weakness, the Nasdaq Composite rallied 0.7% and recovered more than half of its previous day's loss, but an afternoon selloff caused the index to close flat. The other indices showed relative strength by retaining most of their morning gains. The S&P 500 gained 0.4% and the Dow Jones Industrial Average advanced 0.5%. Small and mid-cap stocks, which have been lagging the broad market for several months, suddenly perked up. The small-cap Russell 2000 and S&P Midcap 400 indices rallied 1.0% and 0.8% respectively.
Turnover increased across the board, which could be considered positive for the S&P, but negative for the Nasdaq. Total volume in the NYSE was 12% higher than the previous day's level, enabling the S&P to register a bullish "accumulation day." In the Nasdaq, volume increased by 5%. When an index closes flat, but on higher volume, it is often representative of bearish "churning" because more shares are changing hands, but prices go nowhere. "Churning" is usually a sign of institutional selling into strength, but the Nasdaq's minimal turnover increase of 5% was not substantial enough to declare yesterday's session as "churning." Market internals were mixed. Advancing volume in the NYSE exceeded declining volume by a ratio of 2 to 1, but the Nasdaq ratio was fractionally negative.
In yesterday's newsletter, we highlighted two ETFs that we were stalking for potential long entry, one on a pullback and the other on a breakout. With the Biotech HOLDR (BBH), we were waiting for a pullback to support of the breakout, around the $193.25 level. Yesterday, BBH pulled back to within 70 cents of that level before finishing at $194.66. Since strong stocks and ETFs often pullback to near the breakout level without actually touching it, there is a chance that the short-term correction may already be finished. However, rather than merely guessing, we will analyze today's action to see if a base forms near yesterday's low. If it does, we would then consider buying a breakout above the short-term hourly downtrend line that will form. Remember the most basic tenet of technical analysis states that a prior resistance level becomes the new support level after the resistance is broken. That's why it is a low-risk play to buy BBH on a pullback to the $193 to $194 area. As you can see on the daily chart below, BBH nearly tested new support of its breakout level yesterday:
The other ETF we were stalking for potential entry was the StreetTRACKS Gold Trust (GLD), which we planned to buy on a breakout above its long-term weekly downtrend line. On the open, GLD gapped above the intraday high of the previous day, then trended steadily higher throughout the session, finishing at its best level of the day. Not only did its opening gap put GLD above the weekly downtrend line, but the gap above the previous day's high also increased the odds of further upside momentum in the short-term. Below is an updated daily chart of GLD, which we bought at the 63.90 level:
Human nature might tell you to avoid a stock that closed weak the previous day and then gapped open above that day's high, but that "fear" is exactly why this type of play works. When GLD gapped open above its downtrend line, it attracted traders (such as ourselves) who were waiting for the breakout. That fueled GLD even more, which caused the investors and traders who dumped the previous day, afraid to miss the move, to get back in at a higher price. This is why opening gaps above the high of a previous down day are often among the strongest days.
Though the Nasdaq is definitely weaker, the S&P and Dow remain indecisive and rather choppy. Unfortunately, they may remain that way until earnings season has concluded. Be prepared for a big wave of earnings reports over the next three days.
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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 Dow 30 (DIA) was in the media spotlight by posting a new 52-week high last week. New highs were also hit in the Nasdaq 100 (QQQQ) and the S&P 500 (SPY), but none of the breakouts happened decisively, or in an explosive breakout fashion. Immediately after rallying to a new high, QQQQ backed off rather dramatically in the latter half of last week. At the least, we suspect the broad market's momentum-driven upward surge has slowed. This is confirmed by topping patterns observed in both the S&P Midcap (MDY) and small-cap Russell 2000 (IWM). As you will notice on this week's updated report, our Reversal Stops (S2) have been moved higher in anticipation of progressive weakness. The S&P 500 Growth (IVW) has already triggered to the "descending trend" list. Choppy, range-bound trading in some of the Market Segment ETFs has been in place for about 2 months, but volatility from corporate earnings season may finally enable the broad market to make a decisive move in one direction or the other.
With a few exceptions, the Industry Sector ETFs were relatively calm last week. After a failed breakout, the Semiconductor HOLDR (SMH) fell back below its 200-day moving average and to the bottom of its range. It remains a choppy, sloppy mess. Nanotechnology (PXN) dropped into the descending trend, but is also indecisive and range-bound. Crude Oil (USO) remains depressed near its lows, which is negatively affecting the Oil Services (OIH) and Energy (XLE) as well. Often inversely correlated to the price of oil, the DJ Transportation Average (IYT) is showing relative strength and rallying towards its bullish Reversal Trigger.
There are not many significant trend developments in the International ETFs. Emerging Markets (EEM) and China (FXI) appear to be correcting sharply, but still remain above their uptrend lines because the rallies were so parabolic. For Malaysia (EWM), Singapore (EWS), and Hong Kong (EWH), note that we are keeping the MTG Stops (S1) a little wider than normal, approximately 8 - 9% away from their current prices. Even at these levels, our S1 stops are set to lock in gains of over 20% on all three ETFs since they triggered into the "ascending trend" list.
Three out of the four fixed-income (bond) ETFs we follow are now in the "descending trend" list, but there are several support levels below to keep prices stable.
Alert for 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.