Broad Market Analysis - Rotation out of large-caps, back into the Nasdaq
The major indices diverged sharply for the second consecutive day, as small caps continued to show leadership. Stocks traded sideways throughout the morning, rallied in the early afternoon, then pulled back in the final hour. The S&P 500 lost 0.1% and the Dow Jones Industrial Average was unchanged, but the small-cap Russell 2000 rallied 0.8%. The Nasdaq Composite advanced 0.4%, while the S&P Midcap 400 closed 0.2% higher. Divergence was also found in the intraday patterns. The Nasdaq and Russell both closed in the upper third of their intraday ranges, but the S&P and Dow both finished in the bottom third.
Total volume in the Nasdaq was 1% higher than the previous day's level, helping to confirm the gains in that index. Volume in the NYSE, however, declined 18%. Since both the S&P and Dow closed slightly lower, it's positive that turnover receded. In the Nasdaq, advancing volume exceeded declining volume by a margin of just under 2 to 1. The NYSE ratio was flat.
Over the past three days, the market has been clearly telling astute traders that four-letter tickers is where to find the action. Many S&P and Dow-related industry sectors appear to be entering a period of consolidation, or even setting up for a retracement, while a variety of Nasdaq sectors are waking up. In addition to the semiconductor sector that we have already analyzed, biotechs may be ready to move higher. After a healthy correction off its late-April high, the Biotech Index ($BTK) now appears ready to resume its primary uptrend. As you can see on the chart below, it finished yesterday back above its 20-day exponential moving average and closed right at resistance of its multi-week downtrend line:
As we have pointed out several times in recent months, the popular Biotech HOLDR (BBH) is a laggard ETF and should be avoided. Instead, consider the StreetTRACKS Biotech (XBI), which is showing relative strength to the actual $BTK Index. Notice how XBI closed at a new 52-week high yesterday, even though the $BTK is still trading below its high:
Because of its relative strength, any subsequent gains in XBI should rival those of the $BTK index. On a pullback, one could also expect XBI to retrace less than the $BTK. The First Trust Biotech (FBT) is another option, as its chart pattern most closely mirrors the $BTK Index.
In yesterday's Wagner Daily, we pointed out the potential trade setups that were forming in both the iShares Russell 2000 (IWM) and the Semiconductor HOLDR (SMH). Both setups triggered yesterday, prompting us to buy them. We bought IWM when it broke out above the high of its consolidation. It subsequently closed at a fresh record high. We bought SMH when it rallied above resistance of its hourly downtrend line, though it closed a few cents below our entry point. Unfortunately, negative earnings news from semiconductor company Analog Devices (ADI) may also put some pressure on SMH today.
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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 setup is:
Last week's Stalk of the Week, SLB long, triggered for entry on May 15. It followed through nicely and we closed the trade just two days later for a quick gain of 3.4 points (4.5%). The MTG Stalk Sheet also netted a 4-point intraday gain on AMZN, which we bought and sold on May 21. Presently, the Stalk Sheet is showing a gain of nearly 5 points in RIMM, which we bought on May 22.
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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 responded in favor of the bulls again, as most of the major indices continue to trace the "ascending trend" channels higher. The only Market Segments that faltered were, once again, the Small Caps (IWM), Nasdaq 100 (QQQQ), and Midcaps (MDY). We raised our stops higher, some more aggressively than others, on these Market Segments. Please review the updated ETF Trend Tracker report for more information. The S&P 500 (SPY) is nearing its Reversal Stop (S2) and continues the pace above the steep ascending trend channel.
Making moves in sync with the bullish broad market were Telecom (IYZ), Wireless (WMH), Oil Services (OIH), and Energy (XLE). Biotechs (BBH) continued to fall apart and hit the MTG Stop (S1) again. The Biotech sector has been a disappointment the last couple weeks. Real Estate (IYR) also broke down, cutting through several support levels. IYR is firmly bearish and is new to the "descending trend" list. Nanotechnology (PXN) also landed in the "descending trend" list. Gold (GLD) completed a "head and shoulder" chart formation and has broken the neckline. GLD hit the MTG Stop (S1), broke below the lower trend channel support, and is approaching the entry trigger. However, it is still above support of its long-term uptrend line. We will be monitoring for a potential reversal stop in this area. The Euro Currency (FXE) has been posting lower weekly highs and is approaching the MTG Stop.
Bond (fixed-income) ETFs moved lower as funds rotated into the equity market. The prices broke, or are about to break, April support levels. Watch for potential reversal triggers. The short-term bonds (SHY) held up best, but will test the Reversal Stop (S2) next week.
The international market had another good week, as Latin American ETFs took the lead higher. Brazil (EWZ) is up over 23% since our March 2007 long trigger entry. Mexico (EWW) has also kept the pace, yielding over 8% from our April 2007 entry. Canada (EWC) is worth mentioning again because it has accelerated to a 23% gain. EWC has been our longest holding ETF trend, which began in July 2006. Australia (EWA) has developed a concerning pattern, so we have squeezed the Reversal Stop tightly, to between 1-2% from the current price. On each weekly ETF Trend Tracker, simply click on the corresponding tickers to see annotated chart patterns of the above.
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.