Broad Market Analysis - Gold, Mining, and Transportation leading the way
Stocks snapped a three-day losing streak yesterday, as the major indices posted solid gains across the board. Both the S&P 500 and Dow Jones Industrial Average, fueled by news that aluminum producer Alcoa is being targeted for acquisition, gapped higher on the open, then trended steadily upwards before finishing with gains of 0.8%. Lacking merger and acquisition activity, the Nasdaq Composite showed significant relative weakness. It opened higher, but subsequently moved sideways to lower throughout the rest of the session. One hour before the close, the Nasdaq was unchanged, but an end-of-day bounce enabled the index to close 0.4% higher. The small-cap Russell 2000 advanced 0.8% and the S&P Midcap 400 rallied 0.9%. The Nasdaq finished near the middle of its range, but all the other major indices closed near their intraday highs.
Total volume in the NYSE was 10% higher than the previous day's level, while volume in the Nasdaq increased by less than 1%. The higher volume gain in the NYSE caused the S&P to register a bullish "accumulation day," but one-third of the volume increase was a direct result of Dow component Alcoa's 520% surge in average daily turnover. Volume in the Nasdaq ticked slightly higher, but this was actually negative considering that the index the weak intraday action and the closing price near the middle of its intraday range. Positive market internals, however, helped to confirm the strength. Advancing volume in the NYSE firmly exceeded declining volume by a margin of 3.6 to 1. The Nasdaq ratio was positive by 2 to 1.
Of the major industry sectors we follow on a daily basis, the top-performing one was the CBOE Gold Index ($GOX), which gained 1.9%. For the past three weeks, the index has been consolidating just above its 50 and 200-day moving averages, and now appears poised to break out within the next several days. As illustrated on the $GOX daily chart below, a rally above the February 9 high should enable the index to zoom back up to its prior high from December of 2006:
If the $GOX index breaks out, the ETF that most closely parallels the index is the Market Vectors Gold Miners (GDX). Notice how the ETF has a similar chart pattern to the $GOX index:
The StreetTRACKS Gold Trust (GLD), which mirrors the price of the spot gold commodity, has actually been showing relative strength to the individual gold mining stocks. The gold mining stocks usually move in sync with the price of spot gold, but overall market conditions sometimes lead to a bit of divergence in one direction or the other. Unlike GDX, notice how GLD is already well above its December high:
We have been long GLD since January 23, but we tightened the stop yesterday in order to lock in gains. If GLD drops below its hourly uptrend line, which is basically below yesterday's low, we will close the position and take profits. Over the intermediate-term, GLD has clearly been showing relative strength to GDX. However, GDX rallied 1.3% yesterday, while GLD gained only 0.2%. As such, it is entirely possible that spot gold (GLD) may take a rest while the gold mining stocks (GDX) break out above resistance.
In yesterday morning's Wagner Daily, we illustrated how both the iShares Transportation (IYT) and the StreetTRACKS Metals and Mining (XME) were setting up for potential long entry. As anticipated, a bounce in the broad market enabled both ETFs to break out nicely. With IYT, we mentioned that the ideal entry point was above the upper channel of the "bull flag" formation, while confirmation would come from a rally above the high of February 9. After opening flat, IYT trended steadily higher throughout the day, and actually closed at a fresh all-time high:
XME also broke out above its hourly downtrend line, but closed just shy of its high. If the broad market retains yesterday's gains, there's a good chance that XME will move to a new high today:
We brought IYT and XME to your attention yesterday so that advanced short-term traders could take advantage of the momentum. However, we did not "officially" enter these positions due to the stock market's recent distribution. When one or two sectors are showing relative strength in the face of an indecisive overall stock market, it often requires rapid entries and exits in order to prevent getting chopped up. With "official" ETF trade entries, we usually focus on those that are expected to have "longer-term" time horizons of one to three weeks.
If you wish to learn about Morpheus Trading Group's ETF trade entries on the same day they occur, sign up for a free trial to The Wagner Daily or other MTG services by clicking here (limit one per household). Also, remember that all previously published issues of both The Wagner Daily and The Wagner Weekly are available in the MTG archives. If you are new to our services or wish to broaden your knowledge of ETF trading or our general trading style, we recommend you browse the archives because it is educational and free! Click here to visit the Wagner Daily archives or here to visit the Wagner Weekly archives.
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 at the beginning of the week. 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 moved generally higher until the end of the week. Friday's substantial decline wiped out the majority of the gains that were made earlier in the week, but the primary ascending trends are still intact. As they have been for the past month, industry sectors were choppy again. Broadband (BDH) and Nanotechnology (PXN) touched their bullish reversal stops and have moved into the "ascending trend" list. But not surprisingly, there has been no follow through in either ETF. Silver (SLV) moved into the ascending trend, while the Euro (FXE) headed down to the descending trend column. Again, there was no follow-through in either direction. The only sectors that held up to Friday's bearish tone were Basic Materials (XLB) and Utilities (XLU). Several important adjustments to stops were made this week, so please review the updated ETF Trend Tracker report. Remember that changes to stops can quickly be spotted by looking for cells that are shaded in pink color.
Fixed-income (bond) ETFs tried to rally, but the attempt fizzled out Friday as well. Each one is still in the area of its trigger price. Consider avoiding any additional accumulation of bond ETFs.
Internationally, the remaining ETFs in the "descending trend" list are now back in the "ascending trend" list. But like the U.S. equities market, these ETFs did not have any follow-through after their triggers. The international indices are currently building a base of consolidation.
As discussed recently in last week's Wagner Weekly, the major indices are quite extended within the context of their long-term uptrends. Obviously, nobody knows exactly when a significant correction will occur, but the monthly charts indicate a high likelihood of it happening soon. Fighting the uptrend before a reversal actually occurs is a risky proposition, but complacency on the long side of the market right now is equally dangerous. "Good til canceled" (GTC) stop orders on open positions is a great way to respect risk in the current environment. Stay cautious and alert in the coming week!
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.