Broad Market Analysis - The "moment of truth" for the S&P and Nasdaq
NOTE: The commentary below regarding the technical state of the broad market was sent to Wagner Daily subscribers before today's open. Since then, the major indices have already run into their 20-day MAs, but the technical commentary is still quite relevant.Stocks posted a solid session of gains yesterday, but the light volume once again lacked the power of institutional accumulation. The S&P 500 advanced 1.1% and the Dow Jones Industrial Average rallied 1.0%, but relative weakness in the semiconductor sector caused the Nasdaq Composite to lag slightly behind with a 0.9% gain. The small-cap Russell 2000 and S&P Midcap 400 indices both closed 1.1% higher. Both the S&P and Dow closed near their intraday highs, while the Nasdaq finished just above the middle of its intraday range.
Although yesterday's gains were impressive, it was the same old story of lighter volume "up" days that we have been seeing since the broad market's downtrend began on February 27. Total volume in the NYSE fell 30%, while volume in the Nasdaq was 19% lighter than the previous day's level. Granted, the previous session's volume swelled more than usual due to the "quadruple witching" expiration of options. However, yesterday's turnover was still well below average levels. Both exchanges registered their second lowest volume days of the calendar year. Since the February sell-off began, the S&P and Nasdaq have each had only one day of higher volume gains. Conversely, many of the "down" days continue to coincide with higher volume. Last Friday was the most recent such "distribution day." Until stocks begin to see signs of institutional buying, we just can't trust the market's current rally attempt off the March lows. Market internals were quite positive in the NYSE, but not too strong in the Nasdaq. Advancing volume in the NYSE exceeded declining volume by a margin of more than 5 to 1, but the Nasdaq ratio was only positive by 3 to 2.
In yesterday's newsletter, we illustrated how the relative strength in the Oil Service Index ($OSX) should enable the sector to break out on any further strength in the market. Sure enough, that is exactly what happened. Of all the major industry sectors we follow, the $OSX scored the biggest gain yesterday, surging 2.8% higher:
Because higher volume has not yet confirmed the market's rally off the March lows, we are not very confident the $OSX will go much higher in the short-term. Nevertheless, yesterday's breakout was a good educational example of how stocks and sectors with relative strength to the S&P and/or Nasdaq typically outperform the major indices when the general market moves higher. Remember that anything that does not move lower when the broad market sells-off is usually the first thing to surge higher when the S&P and/or Nasdaq eventually bounces. Obviously, the inverse of that statement is true regarding stocks and sectors with relative weakness.
The S&P, Nasdaq, and Dow are now facing the "moment of truth," as they have each approached resistance of their 20-day moving averages. Further, their 20-day MAs are converging with resistance of their respective March highs. Last week, we illustrated how overhead resistance of the 20-day MAs triggered a resumption of the downtrend, and a subsequent breakdown to new lows, during the broad market's correction from May - July 2006. We shall soon see if history repeats itself this time around. We have pointed out resistance of the descending 20-day MAs on the daily charts of the S&P, Nasdaq, and Dow below:
The Federal Reserve Board begins a two-day meeting on economic policy today that will conclude with an announcement on interest rates tomorrow afternoon. Virtually nobody is expecting an actual change in interest rates, but traders will be highly anticipating any changes in their stance going forward. The recent news of sub-prime mortgage problems combined with fears of a possible slowing in the economy could result in a more volatile reaction to tomorrow's FOMC announcement than usual. Stay alert and 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.
There is no new Stalk of the Week this week due to tomorrow's FOMC meeting.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 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:All the market segments moved generally lower last week and also formed "swing highs" that enabled us to improve the MTG Stop (S1) placements and lower our overall risk exposure on numerous ETFs. Remember that updated stops from last week's report can be quickly spotted by looking for cells shaded in pink color. The S&P Midcap 400 (MDY) remains fairly strong, but also made a lower swing high and is trading below the lower trend channel.
Dropping to the "descending trend" list last week were Retail (RTH), Dow Transportation (IYT), and Regional Banks (RKH). Biotech (BBH) is very weak and trading near the lows. Volatility remains high, as we are seeing more and more industries breaking down. Also dipping to the "descending trend" was the Commodity index (DBC). Conversely, the Euro Currency (FXE) is showing relative strength and is back to test for new highs.
The International ETFs were not immune to the volatility either. Australia (EWA) dipped to trigger our Reversal Stop, but quickly snapped back higher. Most of the international ETFs are working against their primary trend directions due to the recent volatility, so it may be wise to either decrease trade size or stand on the sidelines altogether for now. Knowing when NOT to trade is just as important as knowing when to trade more aggressively if conditions are right. Cash is always a valid position.
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.