Broad Market Analysis - FOMC leaves rates unchanged -- now what?
After shaking off opening weakness, stocks traded in a narrow, sideways range until a positive reaction from the afternoon Fed announcement on interest rates triggered a late-day rally. The major indices surged higher after the Federal Reserve Board failed to say anything surprising during the 2:15 pm announcement. Stocks backed off their intraday highs in the final thirty minutes of the session, but still closed with respectable gains. The Nasdaq Composite advanced 0.6%, the S&P 500 Index 0.7%, and the Dow Jones Industrial Average 0.8%. The small-cap Russell 2000 and S&P Midcap 400 indices both closed at new record highs after posting gains of 0.3% and 0.7% respectively.
Not surprisingly, turnover was light in the first half of the day, but spiked higher in the final ninety minutes of trading. Total volume in the NYSE rose 13%, while volume in the Nasdaq was 25% higher than the previous day's level. The solid gains in the S&P and Nasdaq, combined with the significantly higher volume, enabled both exchanges to register bullish "accumulation days" yesterday. Volume in both the NYSE and Nasdaq also swelled above 50-day average levels, confirming the institutional support of the late-day rally. Market internals were positive, but not as strong as could be expected. Advancing volume in the NYSE exceeded declining volume by a margin of 2.7 to 1, while the Nasdaq ratio was positive by 2 to 1.
All the major indices moved higher yesterday, but unfortunately, most of them remain stuck in a sideways range. The S&P 500 probed above resistance of its six-year high yesterday afternoon, but drifted back down to finish in its prior range. Support of the 50-day MA has held firmly intact, and that moving average has now converged with the January 26 "swing low." Conversely, key resistance on the S&P 500 is now at the 1,440 level (the dashed horizontal line on the chart below):
Since the Nasdaq Composite has been in a sideways range for so long, support of the 50-day moving average has finally risen to near its current price. Yesterday, the index rallied off support of its 50-MA, but again ran into horizontal price resistance of the 2,470 level. As illustrated on the chart below, that is the level where the rally attempt stalled on January 24 and 25 as well. We expect the Nasdaq to break out of its volatility contraction within the next one to three days, so keep an eye on the 2,470 level as resistance and the 50-day MA (2,442) as support. A close above resistance or below support will likely lead to high momentum in the direction of the break for at least a couple of days:
Although its shorter-term daily chart is a bit choppy, the long-term weekly chart of the Russell 2000 Index is looking quite bullish. Since breaking out of a bullish "cup and handle" chart pattern the week of November 17, 2006, the Russell has been forming a flat base that has lasted almost three months. Yesterday, the index set a new all-time closing high, and also probed above the intraday high of December 25. With a bit of buying pressure, the Russell could bust out firmly above the high of its multi-month consolidation. The longer a stock or ETF consolidates, the more momentum the eventual breakout will have. As such, we are now stalking the iShares Russell 2000 (IWM) for a potential long entry above yesterday's high. Note the tight band of consolidation on the weekly chart of IWM below:
The knee-jerk reaction to yesterday's Fed comments was encouraging, but bear in mind the stock market often moves in the opposite direction a few days later. We're not trying to be bearish here, but merely warning you not to get caught up in the excitement of the post-Fed rally until after traders and investors have had a chance to digest the real meaning of the Fed comments. With both the S&P and Nasdaq stuck in the middle of their ranges, whippy and erratic trading action could remain the dominant theme as we enter the month of February. As mentioned several times last month, capital preservation, not scoring large profits, should be your top priority as long as most of the major indices stay range-bound.
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Yesterday, the MTG Stalk Sheet closed a short position in NutriSystem (NTRI) for a gain of more than 15 points, or $3,000 based on the $100,000 model account. Due to a break of its 200-day moving average, we sold short NTRI on January 25 at a price of 61.09, then covered on the open yesterday at a price of 45.42. Negative news after the close on January 30 helped give the final downward push, but the technical break of the 200-day MA was a key reason for the collapse. This is illustrated on the daily chart below:
Congratulations to all subscribers who participated in this sweet trade with us!
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:Last week was marked by high volatility and indecisiveness in all the Market Segment ETFs. The price action ended near the bottom of their respective trading ranges, and many also closed near their bearish reversal triggers (S2). Consider setting price alerts for these S2 levels (or even S1 levels) in a watchlist, so that you are instantly alerted of any mid-week triggers. For example, you could set an alarm, or even enter an actual "GTC Sell Stop" order, to sell short the Dow 30 (DIA) at least 10 cents below its trigger price of $123.17. Giving a bit of "wiggle room" below the actual trigger price is advisable in order to reduce the risk of falling victim of a "stop hunt." Obviously, this would be a short position, and it may be a new experience for you. If you are unfamiliar with selling short, it's good to know the basic pros and cons.
Let's start with the positive. When prices of stocks and ETFs begin to trend down, fear becomes a much powerful emotion than the greed that powers bull markets. As such, prices tend to fall faster, and with greater magnitude, than they go up. However, one potential negative is that a position can infinitely go against you, as opposed to a long position that can only drop to zero. Therefore, it is especially crucial to always place a protective "buy stop" above your short entry in order to protect your account from a large loss.
As for the industry sector ETFs, stops have been adjusted for only a few tickers. Basic Materials (XLB) is showing relative strength and has gained over 2% since January 12. Real Estate (ITR) had the best overall gain last week and it closed near its high. Unlike most of the sectors, there was no pullback from the highs. Moving lower was Nanotechnology (PXN), which closed near the bottom of its range. Gold (GLD) broke out above its prior high last week, causing it to move back to the "ascending trend" list. As for the fixed-income ETFs, the Corporate Bonds (LQD) was the last to enter into the "descending trend" list.
Internationally, Mexico (EWW), Brazil (EWZ), and United Kingdom (EWU) all spiked above their reversal triggers and into the ascending trend, but backed away just as quickly and settled lower in their ranges at the close of the week. The MTG Stop (S1) for China (FXI) is still about 11% away from its current price, but its high volatility requires a wider than usual stop. Since it is in danger of breaking its 50-day MA, we plan to move the S1 higher after a few more days of price action. Several more S1 stop updates were made, so be sure to review the latest ETF Trend Tracker report and your watchlist. Here are some ETFs to watch out for next week.
Alerts of imminent trend 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.