Broad Market Analysis - Commodity-based ETFs breaking out
The major indices began on a negative note yesterday, but shook off opening losses to finish the session modestly higher. The lethargic, range-bound intraday action was similar to the previous two sessions. The difference was that stocks opened lower this time instead of gapping higher. The S&P 500, Nasdaq Composite, and small-cap Russell 2000 indices each advanced 0.2%, while the Dow Jones Industrial Average eked out a gain of 0.1%. The S&P Midcap 400 maintained its relative strength by closing 0.5% higher. Each of the broad-based stock market indexes finished near their intraday highs.
Turnover tapered off again, causing volume in both exchanges to remain below average levels. Total volume in the NYSE was 9% lower than the previous day's level, as volume in the Nasdaq declined by 3%. Usually, it's better if higher volume matches the "up" days because it indicates institutional accumulation. However, the small gains of the past two days occurred within the context of a bullish consolidation at the highs, rather than uptrending days. As such, it's actually positive that volume has been light. Increasing volume near the highs that lacks substantial price gains is bearish because it represents "churning" that occurs when institutions sell into strength. Therefore, we would not read too much into the light volume of the past two days. Market internals in both exchanges finished fractionally positive after recovering from negative levels earlier in the day.
After lengthy periods of consolidation, several ETFs that track a broad array of commodities are now poised for breakout. One of the first to market and perhaps the most well-known is the DB Commodity Index Tracking Fund (DBC). After rallying 0.9% yesterday, DBC closed at a new 10-month high. More importantly, it is about to breakout above its prior high on the weekly chart. Take a look:
As you can see, $25.95 is the pivotal level of resistance. DBC probed a nickel above that level yesterday, but closed just two cents below it. If DBC rallies above yesterday's high in today's session, it will provide us with an ideal entry point for purchase.
The iPath GSCI Total Return Index (GSP) is another commodities-based ETF that bears a similar chart pattern. Largely because GSP is a newer issue than DBC, it has a lower average daily volume than DBC. However, it also has a higher ATR (average true range), therefore giving traders more "bang for the buck." As with DBC, a rally over yesterday's high is the ideal entry point to buy GSP:
Since all ETFs are synthetic and not directly driven by supply and demand, liquidity is never an issue with GSP (or any other ETF). Nevertheless, you may want to use limit orders if the bid/ask spread is wide.
The Semiconductor HOLDR (SMH) is one of two ETFs that we bought within the past week. As you may recall, we bought SMH on May 31 when the Semiconductor Index ($SOX) bounced off support of its weekly uptrend line and rallied back above its 50-day moving average. Since then, SMH has been consolidating in a tight range, holding above its 20-day EMA that it gapped above on June 1. If it holds above that 20-day EMA, SMH should break out above its short-term range within the next several days, then rally to at least test its mid-May high. We remain long in anticipation of such a scenario, though we presently have a protective stop just below the 50-day MA to protect against failure of the reversal:
In addition to SMH, we are also holding a long position in the First Trust Biotech (FBT). We bought FBT, which loosely follows the AMEX Biotech Index ($BTK), when it gapped up above its intermediate-term downtrend line on May 31. Since then, the lack of follow-through has been a bit disappointing, but it closed yesterday at support of both its 20-day EMA and prior downtrend line. Most novice technical analysts know that the lower channel of an steady uptrend provides price support on a pullback, but many beginning traders forget the most basic tenet of technical analysis -- a prior resistance level always becomes the new support level after the resistance is broken. In this case, both the prior downtrend line and 20-day EMA acted as resistance a week ago. However, both of those levels should now provide support on a pullback. If they don't, we want to exit the trade quickly because that is a bearish sign of a failed reversal. We have circled support of the prior downtrend line and 20-day EMA on the daily chart of FBT below:
On a technical level, nothing has changed with the broad market. Each of the major indices remain squarely within their uptrending channels, while the short-term consolidation of the past several days is bullish. With the current uptrend entering its third straight month, the market could easily pull back at any time, without warning. Yet, the 20-day EMAs are well below the current prices of the S&P, Dow, and Nasdaq. Stocks could handle a decent pullback from here and still see no major violations of trendline support. Quite simply, the trend remains "up" until the major indices prove otherwise.
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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, OXY long, worked out well. It triggered on May 31, and we sold it into strength yesterday (June 4) for a quick gain of nearly 2.5 points (4%). Regular subscribers to the MTG Stalk Sheet were instantly informed of our intraday sell decision via e-mail alert.
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:The Bulls were out in force again, closing the week with several indices at new highs. The large caps continued to show resilience, but small-caps and the Nasdaq have begun showing relative strength. With the current uptrend entering its third month without a significant correction, it is important to keep your stops updated in order to lock in gains and limit risk. Remember that the "MTG Stops (S1)" provide an ideal, conservative level at which to trail stops. As experienced at the end of February, remember that a sudden retracement can always occur without warning, especially when general public complacency seems at its highest.
By evaluating the industry sector charts, we can easily find the ones led the broad market higher last week. Here are a few: Telecom (IYZ), Aerospace (PPA), Retail (RTH), Basic Materials (XLB), Wireless (WMH), Consumer Staples (XLP), Technology (XLK), IPOs (FPX), and Water (PHO). After bouncing off support of its long-term uptrend line, the Semiconductor HOLDR (SMH) began perking up over the last few days. However, not all sectors enjoyed the good fortunes of the broad market. Several sectors consolidated or moved lower, such as the Pharmaceuticals (PPH). Banks (RKH) and Financials (XLF) also disappointed, as they lagged the gains of the major indices. The Euro Currency (FXE) continues to erode and is approaching the trend channel support.
The bond (fixed-income) ETFs were active, experiencing their typical month-end volatility. This was compounded by the additional effect of market rotation into equities. All the fixed-income bond ETFs are now in the "descending trend" list. Notice also that the trading range for the short-term bonds (SHY) is only about 1 point over the last 5 months, while the others are ranging between 3 to 5 points. This means SHY has been trading mostly flat, although the daily chart initially appears choppy.
Most of the International ETFs continued to show strength. Germany (EWG), Mexico (EWW), Korea (EWY), and Brazil (EWZ) all made excellent moves higher. In a broader respect, Europe (FEZ) and Emerging Markets (EEM) also closed near their highs. EWZ leaped to more than a 10% gain in one week. As such, the MTG Stop (S1) had to be placed tightly in order to protect gains. On the downside, watch out for the Chinese ETFs such as FXI, which began to show relative weakness after failing its recent breakout. Please check the latest ETF Trend Tracker report for additional comments and updates.
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.