Broad Market Analysis - India ETF poised for further gains
Each of the major indices bounced to recover about half of the previous day's losses, but lower overall volume undermined the reversal attempt. After a relatively flat open, stocks trended higher throughout most of the day before dipping lower at 2:00 pm ET. Buying pressure in the final hour lifted the major indices back to their intraday highs, which is where they settled. Both the S&P 500 and Dow Jones Industrial Average rallied 0.6%, while the Nasdaq Composite gained 0.5%. The small-cap Russell 2000 and S&P Midcap 400 indices were higher by 0.3% and 0.5% respectively.
Turnover declined across the board. Total volume in the NYSE was 7% below the previous day's level, while volume in the Nasdaq decreased by 8%. Stocks have closed higher in six of the past seven sessions, but volume has receded in each of the six "up" days. Conversely, the sole "down" day coincided with a sharp increase in turnover. Lighter volume "up" days and heavier volume "down" days is the exact opposite action a healthy market should display, as it indicates a lack of institutional buying support. Since mutual funds, hedge funds, pension funds, and other institutions are responsible for approximately 70% of the stock market's average daily volume, monitoring the daily relationship between the broad market's price and volume is a great way to know what is happening "under the hood." Still, despite the recent lack of institutional accumulation, "distribution days" of higher volume selling have been sparse. Although institutions may be taking a break from aggressively buying stocks, they don't seem particularly interested in dumping shares either. The divergent chart patterns between the S&P and Nasdaq may be prompting many traders to stand on the sidelines with a "wait and see" approach.
In the July 9 issue of The Wagner Daily, we pointed out the breakout in the Market Vectors Gold Miners ETF (GDX). The following day, we explained how a pullback to the secondary and primary uptrend lines on the hourly chart can be used for gauging a potential entry point. Later that day, we bought an initial position in GDX when it touched support of its secondary uptrend line. GDX subsequently drifted a bit lower yesterday, but is still above its primary hourly uptrend line, which is currently at the 40.10 area. As GDX showed strength into the final hour of yesterday's trading, it may be poised to resume the upward motion of the July 6 breakout. On the daily chart, notice the formation of the "bull flag" chart pattern. We have illustrated this below:
We're already long GDX, but one might consider buying it above the upper channel of its "flag" if still looking for an entry point. Current positions could be added to on a breakout above the high of the flag formation.
Stocks snapped their five-day winning streak yesterday, as the S&P and Dow gave back most of last week's gains. Several profit warnings from the retail sector sparked selling in the pre-market. After the initial gap down, the broad market moved sideways throughout the first half of the session, then sold off again in the afternoon. The S&P 500 plummeted 1.4%, the Nasdaq Composite 1.2%, and the Dow Jones Industrial Average 1.1%. Small-caps fared the worst, causing the Russell 2000 Index to plunge 1.8%. The S&P Midcap 400 similarly lost 1.5%, but the tech-heavy Nasdaq 100 Index showed relative strength by losing "only" 0.9%. Each of the major indices closed at their intraday lows. The StreetTRACKS Gold Trust (GLD) is forming a similar pattern, but the individual gold mining stocks are showing relative strength to the spot commodity. As such, GDX is likely the better play than GLD.
On the international front, China has been getting all the attention lately. However, don't forget about another fast-growing economy in Asia known as India. Over the years, the Chinese and Indian stock markets have taken turns outperforming each other. Lately, China has been on fire, while India has ascended at a slower rate. Based on chart patterns of numerous Indian ADRs we have analyzed, we believe that is about to change. Because of this, we are now stalking the iPath Barclay India Index (INP) for a potential buy. Looking at the daily chart below, notice how INP broke out above its prior high last week, then pulled back on July 10. Yet, it remains squarely above the lower channel support of its primary uptrending channel shown below:
When INP pulled back two days ago, it's bullish that it held above support of its prior high from June 1. Yesterday, it quickly moved back towards the high of the previous day's range. Now that the breakout level has been successfully tested, we plan to buy INP on a breakout above its two-day high. Regular subscribers to The Wagner Daily should note our trigger, stop, and target prices below.
Nothing has really changed in the broad markets. We still have the mixed technical picture of the Nasdaq holding near its six-year high, while the S&P and Dow remain stuck below their prior highs, struggling to stay above their 50-day moving averages. Until one of these indexes wins the tug-of-war between the bulls and bears, trading is likely to remain choppy and erratic. To avoid numerous stop outs and churning your account, the usual rules apply. First, consider reducing your share size, and thus your risk exposure, on all new trade entries. Second, hedge yourself on both sides of the market by simultaneously being long the sectors with relative strength (semis, internets, oil) and short those with relative weakness (broker-dealers, financials, utilities, and now retail). With the exception of QQQQ, most of the broad-based ETFs such as SPY and DIA are presently choppy and should be avoided on both the long and short side. Finally, look for trades that are not directly correlated to the direction of the U.S. markets. Commodity and currency-based ETFs, as well as the numerous international ETFs, are great ways to do so.
If you wish to learn about Morpheus Trading Group's ETF trade entries on the same day they occur, sign up for a free trial to The Wagner Daily or other MTG services by clicking here (limit one per household). Also, remember that all previously published issues of both The Wagner Daily and The Wagner Weekly are available in the MTG archives. If you are new to our services or wish to broaden your knowledge of ETF trading or our general trading style, we recommend you browse the archives because it is educational and free! Click here to visit the Wagner Daily archives or here to visit the Wagner Weekly archives.
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, AMZN long, remains open. As of this morning, it is trading several points above our entry price, holding support of its 20-day EMA. We will continue to monitor its price action and trail a stop higher if necessary. An intraday e-mail alert will be sent to MTG Stalk Sheet subscribers if market action suddenly dictates a change in stop.
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 the most recent ETF Trend Tracker, e-mailed to subscribers last weekend. 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 Segment ETFs are in rally mode again, especially the Nasdaq 100 (QQQQ). The S&P 500 (SPY) and DJ Industrials (DIA) are trailing behind, but will be trying to hit new highs in the coming week. Preparing you in advance for possible trend reversals, bullish in this case, is the main focus of the ETF Trend Tracker. Reversal points are always predetermined, so GTC stop orders can be set in your broker's trading platform prior to the actual reversal triggers. To help narrow the ticker universe, MTG's proprietary algorithm locates high probability ETF targets to trade. Alerts of these imminent reversal tickers are listed below. Be careful with ETFs that reverse trends too often. These tickers are identified as being choppy, and caution should be taken with regard to position size and risk exposure. Tickers that are choppy will be annotated on the ETF charts, which you can view by clicking on the ticker symbols on the report.
Several of the industry sector ETFs reversed towards new high territory. Check out the charts in Semiconductors (SMH) and Wireless (WMH). There is no doubt that their bullishness helped lift the tech-heavy QQQQ higher. Also moving higher were Oil Services (OIH), US Oil (USO), IPOs (FPX), and even Basic Materials (XLB). Making the biggest percentage change is the Aerospace Industry (PPA), ending the week with a 32% gain since our long entry triggered in September 2006. Closing the week lower was Biotech (BBH). We lowered the MTG Stop (S1) to grab a 3% gain on the short side.
The bond market ETFs took a U-turn and headed lower. Especially weak was the Corporate Bonds ETF (LQD), where trading hit a new low within the current trend. This conforming exodus from bonds to equities bodes well for continuation of the uptrend next week.
The International Sector was hot and several ETFs accelerated higher. This prompted us to adjust trend channels and stops higher to limit risk or secure gains. Review the location of our stops to take advantage of the upside volatility. Reversing trends to the "ascending list" are Canada (EWC), Germany (EWG), and Europe (FEZ). Please review the ETF charts for additional comments.
At MTG, we carefully analyze each chart to determine stops, relative to the chart pattern, trend channel, and price action characteristics. At the same time, we constantly monitor risk, regardless of when you have entered your position. Obviously, the most preferred point to enter is at the reversal trigger or using the Reversal Stop (S2) price. With this, we are sometimes able to hold onto certain tickers for several months and capture very sizable gains with defined risks. Lastly, the ETF Trend Tracker should be printed and used as a reference throughout the week.
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.