Long-time readers of The Wagner Weekly know that we prefer to keep it "strictly business" and concise, but I personally must make an exception this week to announce the arrival of the world's youngest ETF trader! My son, Ocean Wagner, was born on October 22, weighing in at a mighty 5.8 pounds. It shouldn't be too long before he learns his first few words, perhaps "trendline," "volume," or even "Fibonacci!" For non-subscribers of The Wagner Daily who haven't already seen a photo of the "small-cap" little guy, here it is (apologies for the redundancy if you've already seen it):
And now, back to our regular weekly commentary. . .
Driven by a strong earnings report from Apple Computer, stocks gapped firmly higher on yesterday's open, dipped to the flat line just before mid-day, then rallied back to the highs late in the afternoon. Once again, wide divergence between the Nasdaq and the other main stock market indexes was prevalent. The Nasdaq Composite cruised to a 1.7% gain, while the tech-heavy Nasdaq 100 Index leapt 2.2% higher. The S&P 500 and Dow Jones Industrial Average advanced 0.9% and 0.8% respectively. The small-cap Russell 2000 climbed 1.0% and the S&P Midcap 400 gained 0.7%. Like the previous day, all of the major indices closed at their intraday highs.
Total volume in the Nasdaq increased 15% over the previous day's level, confirming the presence of institutional buying in the tech arena, but turnover in the NYSE declined by 6%. The higher volume gains in the Nasdaq enabled the index to score a bullish "accumulation day," a positive sign considering the five recent "distribution days." Trading activity was less enthusiastic in the S&P and Dow. Despite the broad-based gains, market internals were not overly strong. In both exchanges, advancing volume exceeded declining volume by approximately 2 to 1. Most of the market's gains resulted from the opening gap up, as opposed to intraday uptrends.
Since breaking out above resistance of their intermediate-term downtrend lines last week, many of the fixed-income (bond) ETFs have been consolidating in a tight range, near their highs. We recently sold the iShares Corporate Bond (LQD) into strength, which netted a nice profit when considering the monthly dividend distributions. Now, we have our eyes on the iShares 20+ year Gov't Treasury Bond Fund (TLT). If it breaks out above the high of its three-day range, we plan to initiate a long position:
Again, remember that one of the biggest benefits of trading the fixed-income ETFs is their monthly dividend distributions. Though the volatility of the actual ETF is rather low, it's not that bad when considering substantial dividends are paid at the beginning of every month. If we buy TLT on the breakout, our target will be a new 52-week high, at which point we will trail a stop to lock in gains. Our stop will be below support of the recent range.
Though the Nasdaq has been showing relative strength ever since the August 18 broad market bottom, the bullish divergence in the index has really become apparent over the past two days. While the S&P 500 has recovered just over half of its large loss from the October 19 sell-off, the Nasdaq has already recovered all of that day's loss. This is in line with what we said in yesterday's Wagner Daily, which was "If the broad market manages to stabilize near current levels, expect the Nasdaq indices to be the first of the broad-based indexes to zoom back to new highs. If buying the market right now, the Nasdaq is clearly the place to be. . ." After closing below its 20-day EMA for only one day, while remaining firmly above its 50-day MA the whole time, the Nasdaq Composite is once again poised to break out to new highs:
Unlike the Nasdaq, both the S&P and Dow have a lot of overhead resistance from their recent sell-offs, so those indexes will likely be the first to break down to new lows if another round of selling hits the market. The current dynamic in the market is rather unusual, as the price divergence within the main stock market indexes is quite substantial. Other than sitting in cash, which is never a bad idea, the only logical thing we can do is follow the trends through buying strong sectors in the Nasdaq when they pull back, and/or selling short the weak sectors in the S&P/Dow when they bounce into resistance.
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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:The Nasdaq 100 (QQQQ) continues to show the most relative strength of the broad-based ETFs, even as the stock market entered a corrective phase this week. The other market segment ETFs were weaker, as their price action was marked by breaches in the trend channel support levels.
The bond market perked up last week, as many of the fixed-income ETFs broke out above their intermediate-term downtrend lines. Performing best was the Corporate Bonds (LQD), but it is just above our entry trigger. Holding bonds while trending higher has the combined benefit of realizing gains from the underlying ticker and receiving regular monthly dividends.
The International sector was mixed, with the majority of the ETFs consolidating near their current levels. The horizontal movement of consolidation again caused pricing patterns to trade in the vicinity of the trend channels. Only China (FXI) managed to post gains well enough to stay above its steep trend channel. Again, the FXI "MTG stop" is over 10% due to its volatility, but you may wish to trail a protective stop tighter to lock in gains. FXI has gained a whopping 54% since triggering to our "ascending trend" list in mid-August 2007.
If you followed our stops on Friday, most of the "ascending trend" ETFs that hit their MTG or Reversal Stops would still have been closed with net gains since triggering for long entry. The coming week is likely to be volatile, so be sure to honor your stops on all remaining long positions. Further, new short sale opportunities have begun appearing and will probably continue to do so in the coming week. For now, consider selling short any ETF that just hit its Reversal Stop (S2), as new downtrends may be developing in those ETFs. Next week's ETF Trend Tracker will likely be populated with many more ETFs on the "descending trend" list, but you can get an early start by selling short ETFs as those on the "ascending trend" begin hitting their Reversal Stops (S2). In The Wagner Daily newsletter, note that we are already short XLU and OIH, both of which just reversed to the "descending trend" list. Both are showing substantial gains since our Wagner Daily short entries.
Notice that no stops were hit within the "Specialty ETFs" group. This is an important observation, as it tells us that group of ETFs is showing relative strength to the broad market. Along with the fixed-income (bond) ETFs, which were quite strong last week, the various specialty ETFs may be a good place to move capital. Specifically, the commodity and currency ETFs continue to act great. Clean Energy (PBW) barely flinched on Friday. Separately, we noted that SLV (Silver) had a bad tick that looked as though its S1 stop was hit, but it actually never traded below $132 on Friday.
Heads up if you're long any International ETFs. Many of them formed bearish patterns on Friday and appear poised to hit their MTG and/or Reversal Stops. If they do, our trailing stops will still have enabled us to lock in solid gains. China (FXI), for example, is currently showing a gain of more than 50% since our long trigger on August 22 of this year. If the MTG Stop (S1) is hit, we will still net a gain of 43%!
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