After gapping higher on the open, the broad market oscillated in a tight, sideways range before closing with solid gains yesterday. Unlike the previous two sessions, strength in the final thirty minutes of trading enabled all of the major indices to climb at least one percent and close near their intraday highs. The Nasdaq Composite led the way again, rallying 1.3%, the S&P 500 gained 1.2%, and the Dow Jones Industrial Average advanced 1.1%. The small-cap Russell 2000 and S&P Midcap 400 indices were higher by 1.3% and 1.4% respectively.
Not only was the intraday price action an improvement over recent sessions, but volume also picked up a bit. Total volume in the NYSE increased 7% over the previous day's level, while volume in the Nasdaq rose 8%. Though turnover ticked only moderately higher, it was enough for both the S&P and Nasdaq to score a bullish "accumulation day." Strong market internals also confirmed the higher volume gains. Advancing volume in the NYSE exceeded declining volume by 5 to 1. The Nasdaq ratio was positive by 3 to 1.
Despite yesterday's decent session, both the S&P 500 and Nasdaq Composite closed right at key resistance of their intermediate-term downtrend lines. The "moment of truth" is coming soon, as the ability or inability to climb above their month-long downtrend lines will clearly show us whether or not institutional buying has returned. Take a look at the proximity of the downtrend lines to yesterday's closing prices:
At the very least, one should expect an intraday probe above these downtrend lines today. At key support and resistance levels, the specialists typically run stops that investors place at obvious levels. However, it's the actual closing price that matters. Although not shown on the charts above, both the S&P and Nasdaq also closed at resistance of the 50% Fibonacci retracement from their July highs to August lows. In strongly trending markets (up or down), the 50% retracement level is usually difficult to overcome, at least on the initial attempt.
The major indices have now retraced substantially off their recent lows, but most of the gains from their August 16 lows have come in the form of opening gap ups, rather than intraday uptrends. This has made it difficult for traders to enter even near-term long positions with a positive risk/reward ratio. We have not been opposed to buying a few ETFs for quick, momentum-driven moves since the recent bottom, but price and volume action have not been very convincing. Conversely, it has been risky to put on new short positions since the August 16 reversal day because the broad market has not yet given us any signals that the bounce is finished. A break below the prior day's lows could trigger such a sell signal.
Because of the action described above, we have remained "flat and happy" over the past week. Considering the substantial gains we netted during the preceding selloff, there's been no reason to risk giving those profits back by taking unclear trade setups. Nevertheless, we bought a HALF position of the inversely correlated UltraShort Dow 30 ProShares (DXD) into yesterday's gap up in the Dow, just to dip a toe in the water. If you've been looking for a level to enter new short positions, the current test of the intermediate-term downtrend lines in the S&P and Nasdaq provides a very positive risk/reward ratio. This also means that new long positions at current levels provide a minimal risk/reward ratio because of the key resistance just overhead. If the indices blow through their downtrend lines on a CLOSING BASIS today, all bets on the short side would be off. Otherwise, one could assume the established downtrend lines will remain intact, leading to subsequent selling pressure in the broad market.
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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:
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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:Another week of heavy volatility fell upon us again, but did not cause too much damage in either trend direction as of Friday's close. As such, we did not change any stops in the Market Segments. If the large ranging days begin to stabilize, we will narrow the Stops and work them tighter to reduce risk or preserve gains. We did notice that the Midcaps (MDY) did not recover as well as the other indices and remains well below our trigger level. The Nasdaq 100 (QQQQ) and the Dow 30 (DIA) rallied back up to near their trigger levels.
The volatility took down more ETFs in the Specialty sector. Clean Energy (PBW) and Water Resources (PHO) were hit. PBW has been extremely choppy and has been experiencing large swings in its range. Regional Banks (RKH) and Financials (XLF) rallied back quite a bit and took on the recovery the best. Biotech (BBH) remains depressed and is consolidating near the lower portion of its range.
The bellwether mid term T-Bonds (IEF) is now on the ascending trend. The short term T-Bonds (SHY) sprinted higher after breaking into new highs and closed the week near the top of its range. The Corporate Bonds (LQD) remains weak and hit new lows.
All the International ETFs are in the "descending trend" list. Australia (EWA) and Japan (EWJ) showed relative weakness last week and did not move well while other markets rallied. Observe all the updated stops in the current ETF Trend Tracker report.
New features were added to the ETF Trend Tracker report last week. A "percentage risk" column for both the MTG Stop (S1) and Reversal Stop (S2) givea the risk of the stops, relative to the triggered price. In the "ascending trend" sectors, a positive value indicates the gain that would be expected if the price were to decline to that stop price. A negative value indicates the risk or loss expected if the stop were to get hit (inversely with values in the "descending trend" listed sectors). Typically, the S1 is more active and follows the current price more closely due to its use as a mid-trend entry stop. At times, you will notice that the S1 and/or S2 introduce a risk beyond what is a prudent for a trade, usually exceeding 8%, for example. Entering a trade using an appropriately small position size could compensate for this.
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.