An indecisive session kept both the bulls and bears on their toes yesterday, but the bulls eventually managed to push stocks higher for the first time since December 12. After opening higher, the major indices quickly turned tail, weighed down by cautious comments from financial giant Goldman Sachs. By mid-day, the broad market had fallen into firmly negative territory. Buying interest emerged in the afternoon, for a change, enabling the broad-based indexes to score solid gains. The Nasdaq Composite climbed 0.8%, the S&P 500 0.6%, and the Dow Jones Industrial Average 0.5%. The small-cap Russell 2000 fully recovered the previous day's loss with a 2.0% gain. The S&P Midcap 400 advanced 0.7%. The main stock market indexes finished in the upper third of their respective intraday ranges.
Total volume in the NYSE rose 5%, as volume in the Nasdaq ticked 2% above the previous day's level. Although it's typically positive when the S&P and Nasdaq gain on higher volume, a closer look at yesterday's volume patterns tells a different story. At mid-day, after stocks had trended lower all morning, volume in the NYSE was tracking 10% higher than the prior day's level. Nasdaq volume was on pace to rise by 15%. But since trading activity finished only 5% higher in the NYSE and 2% higher in the Nasdaq, turnover actually backed off when stocks reversed higher in the afternoon. Conversely, it would have been more encouraging if turnover was coming in lighter during the morning sell-off, then picked up steam alongside of the afternoon rally.
The iPath India Index (INP), perhaps the strongest international ETF in recent months, formed a bullish "hammer" candlestick after testing support of its 50-day MA yesterday. This is illustrated on the daily chart below:
Since the December 17 sell-off was pretty vicious, we don't expect INP to immediately snap back to its prior high. However, INP should at least consolidate and build a base of support in this area because it was the first touch of the 50-day MA in more than 3-months. When a stock or ETF has been trending strongly higher for several months, the first test of the 50-day MA, on a pullback, often presents a good buying opportunity. Rarely will a strong ETF slice right through its initial touch of the 50-day MA without attempting to resume its primary uptrend at least once. This is not necessarily the case with subsequent tests of the 50-day MA in shorter periods of time. Overall, we suggest adding INP to your near-term long watchlist, but give it a few days to make sure it stabilizes and builds a small base near this key support level.
In yesterday's commentary, we mentioned that the S&P 500, Dow Industrials, and Nasdaq Composite are each in the process of completing a bearish "head and shoulders" chart pattern on their respective long-term weekly charts. Since the three indexes are showing similar chart patterns, let's take a look at the financial media's favorite market barometer, the Dow Jones Industrial Average. Below is the weekly chart of the Dow Jones DIAMONDS (DIA), a well-known proxy ETF for the index itself. We have removed all moving averages so that you can more easily see the chart pattern:
As annotated above, the "left shoulder" formed throughout July, the "head" formed with the October peak, and the "right shoulder" began shaping up this month. The "neckline," which ascends slightly, is formed by connecting the August and November lows. Notice that volume was higher during the formation of the left shoulder than when both the head and right shoulder were formed. This is bearish because it indicates declining buying interest on each subsequent rally attempt of the head and right shoulder. Traders often forget to analyze volume patterns throughout the formation of the head and shoulders pattern, but the correct volume pattern increases or decreases the odds of the pattern following through to the downside.
Though the head and shoulders pattern is setting up clearly, remember that we're looking at a weekly, not daily chart. As such, it could easily take another month or two for the Dow to fall below its neckline and begin following through to the downside. If/when the neckline eventually breaks, the predicted downward drop is equal to the measured distance from the top of the head down to the neckline. (NOTE: For a great example of this, check out the daily chart of the Russell 2000 Index (or IWM), which formed a head and shoulders pattern from September through November of this year, then perfectly followed through with its predicted drop by the end of November.) In the current case of the Dow weekly chart, there was a 10% drop from the top of the head down to the right side of the neckline. Another 10% below the neckline would put DIA around $114 (approximately 11,450 for the Dow index).
If the Dow breaks its neckline in the near future, a correction down to the 11,450 area may seem quite substantial. . .until you consider how high the Dow has surged within the past five years. From its October 2002 low to its October 2007 high, a span of exactly five years, the Dow amazingly doubled! Therefore, a complete follow-through of the head and shoulders pattern down to 11,450 would only be equivalent to a 38.2% Fibonacci retracement of that entire range. Both the S&P 500 and Nasdaq Composite have more than doubled during that five-year period as well, and both are showing similar head and shoulders patterns on their weekly charts. Rather than breaking their necklines, the major indices could just as easily move sideways and "correct by time" throughout the early part of 2008. Still, the astute trader is one who remains fully cognizant of the "big picture" at all times. Doing so keeps emotions in check and assists in "trading what you see, not what you think."
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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 volatile main stock market indexes finished last week lower, and below the lower boundary support of their three-week uptrends off the late November lows. Most of the Market Segment ETFs are still above their prior "swing lows" from December 4, but we expect those levels to be tested soon. The broad market's countertrend bounce off the lows appears to be running out of steam, and stocks will need to stay above support of their December 4 "swing lows" to continue the momentum higher.
Due to a collapse in two of its heavily weighted stocks, Biogen and Genentech, the Biotech HOLDR (BBH) came crashing down, plunging below its 200-day moving average. BBH is entering a major support area from the August lows and will likely chop around in this area until institutions regain an interest in the large-cap biotechs. A few industry sectors triggered to the "ascending trend" list, but quickly deteriorated through the week. So far, the market lacks bullish follow-through and upside momentum, making the long side of most industries a bad bet.
Utilities (UTH) and Oil Services (OIH) are about the only major sectors consolidating near their highs, but they too saw major weakness last Friday. It is possible that some of the recent ETFs that reversed to the "ascending trend" list will hit their reversal triggers again in the coming week. Please see our annotations about choppy trend patterns in numerous ETF Trend Tracker charts, which can be viewed by clicking on any ticker symbol in this week's report. Further, be sure to honor your protective stops and limit position sizes during the current volatile conditions.
In the Specialty ETF arena, the Commodity Index (DBC) closed the week near its high. Thanks to major strength in the solar energy stocks, a rally is taking place in Clean Energy (PBW), which is about to post a new high. The US Dollar gained ground last week, causing the Euro Currency (FXE) to gap down below near-term support. Gold (GLD) is forming a wedge pattern and entering into a volatility contraction. A break in either direction will likely carry a lot of near-term momentum. Silver (SLV) was weaker than GLD on the pullback, and has landed in the "descending trend" list.
The fixed-income (bond) ETFs dipped lower for another week. The relatively weak Corporate Bonds (LQD) reversed to the "descending trend" list.
International ETFs were generally lower, as a few ETFs that briefly popped to the "ascending trend" list mid-week reversed lower with the rest of the globe at week's end. India (INP) remains the strongest international ETF, but it has begun to retrace from its highs. It's been a roller coaster ride everywhere, even with the long-term perspective we take.
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.
The Morpheus Trading Group web site has just been updated to show several live seminars in which Deron Wagner will be participating in the beginning of 2008. The highlight of these events is the Live ETF Trading Seminar in Fort Lauderdale, Florida on February 9. A separate announcement regarding this seminar was sent a few days ago. For those of you who prefer the north, Wagner will be presenting at the New York International Traders Expo. less than two weeks later. For details of these upcoming events, please visit the Upcoming Trading Seminars web page.