Table of Contents


• Broad Market Analysis - Semiconductor Index ($SOX) poised for next leg up
• MTG Stalk of the Week - JCP short
• ETF Trend Tracker weekly commentary

Broad Market Analysis - Semiconductor Index ($SOX) poised for next leg up

Downside momentum from Monday afternoon's slide carried into yesterday morning's session, but stocks again showed their resiliency by recovering to close modestly higher. The Nasdaq Composite was off by 0.6% at its morning low, but the index reversed to a 0.3% closing gain. The S&P 500 also advanced 0.3%, while the Dow Jones Industrial Average rallied 0.6% to another historical closing high. The small-cap Russell 2000 and S&P Midcap 400 indices nearly kept pace this time, gaining 0.2% and 0.3% respectively. Each of the major indices finished near their intraday highs, often a sign of institutional support.

Despite the previous session's bearish "distribution day," turnover rose even more during yesterday's recovery attempt. Total volume in the Nasdaq jumped 11%, while the NYSE volume increased 1% above the previous day's level. The broad-based gains on higher volume caused both the S&P and Nasdaq to register "accumulation days," softening the blow of Monday's institutional selling. Nevertheless, market internals were not very strong. Declining volume in the Nasdaq fractionally exceeded advancing volume. The NYSE ratio was positive by just 1.2 to 1.

Over the past several days, the Semiconductor Index ($SOX) has corrected from the high of last week's breakout. Yesterday, the $SOX dipped below support of the breakout level, but closed above it. The dashed horizontal line on the chart below marks pivotal support of the breakout level:

We view the current pullback in the $SOX as a buying opportunity, as the index has already tested and held support of its breakout level. If buying individual stocks or ETFs in the sector, just be sure the $SOX remains above yesterday's low of 488. If it doesn't, it might be prudent to quickly sell any semiconductor positions. Since the recent $SOX breakout was from a six-month base of consolidation, it would be rather bearish if the index fails to hold above the pivot. SMH, IGW, PSI, and XSD are ticker symbols of the various semiconductor ETFs. Of these, SMH has shown the most relative strength because it is primarily composed of "old school" large-cap stocks that are being accumulated the most right now. Regular subscribers to The Wagner Daily should note our trigger, stop, and target prices for the SMH trade setup below.

When comparing various ETF families within the same sector, "percentage change" charts that compare the relative performance of each ETF are a great way to visually see which ETFs are leading and lagging. Rather than plotting the price changes of a stock or ETF, "percentage change" charts only show the percentage that an equity has gained or lost within a particular time period. The chart below compares the relative performance of each semiconductor ETF since the $SOX index broke out two weeks ago. As you can see, SMH is leading the others:

Since this week's broad-based correction began, the Retail Index ($RLX) has shown a lot of relative weakness. After plummeting 1.9% on Monday, the index bounced only 0.4% yesterday. It is also in danger of falling below support of its 50-day moving average, which it tested yesterday:

Confirmation of the relative weakness is that the retail index is still below its prior high from February. Considering that both the S&P and Dow zoomed above their prior highs several weeks ago, the $RLX is clearly a laggard. A quick look at the recent performance of leading individual retail stocks further confirms the chart of the $RLX. Though we don't advocate aggressive selling short yet, retail should be among the downside leaders if the broad market builds on Monday's losses in the coming days. Ticker symbols of Retail ETFs to check out include: RTH, XLY, IYC, XRT, and PMR. A complete list can be found on the free Morpheus ETF Roundup.

As anticipated, the S&P 500 tested support of its primary uptrend line yesterday, and closed above it as well:

Short-term support on the S&P should now be found at yesterday's low of 1,476, as this converges with support of the intermediate-term uptrend line. If this level is broken, secondary support of the 20-day exponential moving average is at the 1,469 area. If you're holding long positions, you may wish to set price alerts to notify you when/if the S&P breaks these levels because a wave of heavy selling could likely follow. But it's obviously bullish if the index merely trades sideways to higher throughout the rest of the week. Because of the recent distribution, it might be difficult for the S&P to move above resistance of its high at 1,498. If the index tries and stalls, consider dumping remaining long positions into strength. As for short selling, most setups still carry a negative risk/reward ratio as long as the S&P remains above its 20-day EMA. Intraday trades might be the exception, especially within the relatively weak small-cap arena.

The Nasdaq Composite probed below its primary uptrend line on an intraday basis, but closed just above it. Yesterday's low of 2,510 was just three points above support of the 20-day EMA, so that range of 2,507 to 2,510 is key support for the Nasdaq in the coming days. The Nasdaq barely closed back above its prior high from February, another pivotal level that many traders are watching.

If you want to be long this market, the large-caps clearly remain the place to be. The Dow Jones Industrials Average keeps powering ahead to new all-time highs, while barely pulling back when the other indexes do. Only 3 losing days in the last 23 sessions proves its relative strength. How can one argue with that? Still, even the most ardent bulls would be wise to deploy caution at current levels. Over the years, we have learned that the sharpest market corrections occur when the picture seems incredibly rosy, not when everyone is expecting an obvious drop. Ideally, the Dow and the other major market indexes will gracefully ride out a "correction by time," merely drifting sideways for the next week or two. But a break below yesterday's low of 13,041 would call off all bets on the Dow, as that would correspond to a move below its recent price consolidation.

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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: