Broad Market Analysis - Will the S&P and Nasdaq reverse their downtrends?
The market broke out of its choppy, erratic four-day trading range yesterday, enabling each of the major indices to rally back above their 50-day moving averages. Stocks moved higher in the first ninety minutes of trading, then drifted sideways throughout the remainder of the day. The Nasdaq Composite zoomed 1.2% higher, the S&P 500 gained 0.9%, and the Dow Jones Industrial Average advanced 1.0%. The small-cap Russell 2000 and S&P Midcap 400 indices were higher by 1.1% and 0.7% respectively. The major indices backed off their highs late in the afternoon, but they still finished in the upper third of their intraday ranges.
Turnover was higher across the board, pointing to institutional accumulation behind yesterday's gains. Total volume in the Nasdaq was 12% higher than the previous day's level, while NYSE volume increased by 4%. But despite the "accumulation day," it's noteworthy that turnover in both exchanges remained below 50-day average levels. Like we mentioned yesterday, volume is likely to remain on the light side ahead of the three-day weekend. Market internals were solid, as advancing volume in the NYSE exceeded declining volume by a margin of 3.7 to 1. The Nasdaq ratio was positive by 3 to 1.
After consolidating below resistance of its 50-day moving average for four consecutive days, the S&P 500 gapped back above it. The Nasdaq and Dow followed suit as well. The reclamation of the 50-day MAs is obviously bullish for the broad market, but several of the other major indices are now facing more significant resistance of their prior highs from March. This situation is clearly apparent on the daily chart of the S&P 500:
As you can see, 1,438 marks the "swing high" that the S&P formed last month. Yesterday, the index probed above that level on an intraday basis, but settled just below it. If the S&P firmly closes above that level in the coming days, its "higher low" and subsequent "higher high" will represent a break of the intermediate-term downtrend. If this occurs, we will certainly respect the positive change in trend, but we simply must assume the intermediate-term downtrend will continue until the market proves otherwise. Although it's unusual for an index to completely recover from such a sharp correction in only five weeks, the possibility is not out of the question. Notice how the Nasdaq Composite has a similar pattern:
Just below 2,460 is the Nasdaq's "swing high" from March. Unlike the S&P, the Nasdaq has not yet tested that resistance level, though it will probably do so in the next one or two days. The Nasdaq is also further off its 52-week high than the S&P, so overhead supply may keep any rally attempt in check. Finally, take a look at the Dow Jones Industrials:
Mirroring the S&P 500, the Dow probed above resistance of its "swing high" yesterday afternoon, but closed just a hair below it. It will only take a gain of one point or more for the Dow to close above its March high, but the blue-chip index is still 120 points below the intraday high of the February 27 sell-off.
In yesterday's Wagner Daily, we explained why we were in "wait and see" mode with regard to entering new positions. Even though the last session was bullish and technically significant, we're still playing it cautiously with new trade entries until we see whether or not the S&P, Nasdaq, and Dow have enough momentum to push through their "swing highs" illustrated above. Traders and investors typically scale back their operations ahead of holiday periods, so we may need to wait until next week to see whether or not yesterday's gains were merely a relief rally or the start of a new intermediate-term uptrend.
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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 play 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:Last week's price action caused several "swing high" formations to be formed before the market edged lower. The majority of the Industry Sector ETFs have new MTG Stops, which take into account these "swing highs." Please review the latest ETF Trend Tracker for updated information. Cells shaded in pink color denote changes since last week's report.
US Oil (USO) and the Commodity Index (DBC) both rallied into the "ascending trend" list, as was pointed out in last Friday's Wagner Daily as well. Telecom (IYZ) remains at the upper end of its trading range and does not have correlation with the general market. The Utilities SPDR (XLU) is showing relative strength and looking to head higher, but corrected a bit last Friday. Showing relative weakness was the Biotech sector (BBH). BBH is trading near the bottom of its range and will be testing for new lows in the coming weeks ahead. Due to a heavy weighting in a few underperforming stocks, BBH is also showing relative weakness to the actual Biotech Index ($BTK).
The bond market was a little confused last week. In general, the fixed-income (bond) ETFs moved lower, but the short-term bonds (SHY) held its ground and briefly touched the new high territory. We are holding our stops here until a cleaner pattern develops in these ETFs. Again, month ending prices will drop due to dividend payments. Many of the popular ProShares ETFs also paid quarterly dividends last week.
There was not much in the way of trend changes on the International front last week. Several ETFs formed "swing low" formations that should act as support for ETFs in the "ascending trend" list. Closing in on new highs are Brazil (EWZ) and Australia (EWA). Approaching Reversal Stops are Korea (EWY), Malaysia (EWM), Singapore (EWS), and Emerging Markets (EEM).
Alert 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.