Stocks gapped open higher for the second straight day, but this time the gains remained intact. The major indices built on their opening advance, grinding higher throughout the day, before finishing near their intraday highs. Both the S&P 500 and Dow Jones Industrial Average gained 1.4%, while the Nasdaq Composite climbed 1.5%. The small-cap Russell 2000 and S&P Midcap 400 indices were higher by 1.6% and 1.2% respectively. Despite erratic volatility in the final thirty minutes of trading, the broad market closed strong for the first time in weeks.
Unfortunately for the bulls, yesterday's rally lacked the confirmation of higher turnover. The main ingredient of bullish trend reversal attempts, overall volume levels fell in both exchanges. Total volume in the NYSE registered 3% below the previous day's level, as volume in the Nasdaq ticked 1% lower. Although volume eased only slightly, it was a sign that institutions are still quite complacent. Most likely, mutual funds, hedge funds, and other institutional investors are in no hurry to jump back in the markets until they see the Fed's next move on September 18. Despite lower turnover, market internals were solid. In both the NYSE and Nasdaq, advancing volume exceeded declining volume by a ratio of approximately 5 to 1.
Zooming 2.3% higher yesterday, the Biotech Index ($BTK) was one of the day's top performing industry sectors. After a brief pullback to support on Monday, the iShares Nasdaq Biotech (IBB) similarly gained 2.1% yesterday. The successful test of support is annotated by the pink ellipse on the daily chart of IBB below:
If IBB moves just a bit higher and clears the $82 area, it will have popped above horizontal price resistance from May of this year. That should enable IBB to subsequently test resistance of its 52-week high shortly thereafter. Overall, IBB is acting well since breaking out above its downtrend line early last week. Our IBB position is presently showing an unrealized gain of more than 2 points since our August 31 long entry, but our price target remains about 1.5 points higher. We plan to sell IBB into strength as it tests resistance of its 52-week high.
Since breaking out above its 50-day MA on August 31, the Oil Service HOLDR (OIH) is another ETF that has been acting well. On September 10, OIH pulled back to test support of its breakout, then formed a bullish "hammer" candlestick pattern into the close. It followed through with a gain yesterday, and is now poised to break out above its short-term consolidation. Take a look:
Now that the breakout above the 50-day MA appears to be holding, we may buy OIH on a rally above its September 6 high of $185.60. Such a move should enable OIH to carry on to a new record high. Because the current chart pattern resembles a "cup and handle" pattern, a rally above the high of the consolidation is more important than waiting for a breakout above the July high.
In yesterday's commentary, we illustrated resistance of the hourly downtrend lines for the S&P, Dow, and Nasdaq. As one might have guessed, yesterday's substantial gains enabled all three indexes to close above those trendlines. As you can see, the S&P 500 also moved back above its 200-day MA:
The breakout above the hourly downtrend lines in all three main indexes is bullish in the short-term, but the intermediate-term picture remains pretty fuzzy. The S&P 500, for example is now trapped between a rock and a hard place. Notice how the 200-day MA continues to flex its muscles by providing support, but the closely watched 50-day MA looms just overhead. The first test of the 50-day MA on September 4 was instantly met by selling that led to the current short-term downtrend. Further, the 50-day MA now converges with upper channel resistance of the intermediate-term downtrend (the red descending line). Clearly, it will take some work for the S&P 500 to absorb that overhead supply. The power of institutional buying could certainly do it, but it should prove difficult to move much higher if overall volume remains stagnant. For that reason, continue to pay close attention to not only the market's price action, but the changes in turnover as well.
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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:Continued divergence between the Nasdaq and S&P 500 led to more volatility in the indices last week, as three-hundred point weekly swings in the Dow are becoming the norm. The broad-based sectors attempted to rally in the beginning in the week, but closed at their lows after selling off sharply on Friday. Counter-trend retracements, such as the broad rally we have seen over the past several weeks, are often short-lived. But from a technical level, the good thing is they provide clearly-defined upper and lower channels of support and resistance for use in setting stops. With the S&P 500 (SPY), for example, the previous area of price support from May - June 2007 has acted as resistance both in August and September. Clicking on the SPY ticker below also reveals that our MTG Stop (S1) coincides with this area of price resistance. Aggressive traders may consider a new or re-entry short position near this S1 stop level, as it presents a positive risk-reward ratio on the short side. As the market is trying to reverse off last month's lows, remember that prior areas of price support always become the new areas of price resistance after the support has been broken. Conversely, several near-term support levels are presently in play, which may lead to choppiness in the coming week.
A handful of industry sectors briefly reversed into the "ascending trend" list, but their upside momentum has been limited due to continued bearish sentiment in the broad market. Showing relative strength are several technology-related sectors, as well as biotech and oil. Gold (GLD) broke out above a major area of price consolidation on its weekly chart and should continue higher in the intermediate-term. When reviewing this week's charts, look out for patterns we have labeled as "choppy." This indicates setups in which the risk probably exceeds reward.
Last week yielded some excitement in the bond market for a change! Although the rally in the fixed-income ETFs started back in June, new money rotating into the sector gave both the mid and long-term bonds (IEF and TLT respectively) a boost to new highs within their current trends. It seems as though large institutions have begun parking cash into fixed-income bonds and ETFs in order to weather the current volatility. Speculation of further rate cuts is also a factor, as lower yields lead to higher bond prices. The Wagner Daily profited through buying both TLT and LQD (Corporate Bond Fund) last week.
The International sectors traded similarly to our domestic market. Mexico (EWW) was hit the hardest, giving back nearly 3% on Friday's close. Like the industry sectors, the early bullishness also took a few international ETFs into the "ascending trend," but they have backed off from their trigger entry levels. Emerging Market (EEM) is one such ETF that has a very poor risk-reward ratio and a choppy chart pattern. It should presently be avoided.
In indecisive markets, remember that sitting on the sidelines, waiting primarily in cash, is indeed a valid strategy! Many profitable investors are out of the markets more than they are in the markets, though this requires patience and discipline for beginners.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.