Showing no relief into the new year, institutional selling pressure caused the Nasdaq to suffer its fourth straight day of losses yesterday. Stocks opened slightly higher, but the bears quickly resumed control, setting in motion a steady downtrend throughout the morning. An afternoon rally attempt initially showed promise, but traders sold into strength shortly thereafter. The S&P 500 fell 1.4%, the Nasdaq Composite 1.6%, and the Dow Jones Industrial Average 1.7%. The small-cap Russell 2000 lost 1.6% and the S&P Midcap 400 shed 1.2%. A small bounce in the final fifteen minutes lifted the major indices off their worst levels, but they still closed in the bottom quarter of their intraday ranges.
The most negative aspect of yesterday's sell-off was that volume spiked significantly higher as well. Total volume in the Nasdaq soared 44% above the previous day's level, while turnover in the NYSE similarly surged 26%. In both the NYSE and Nasdaq, declining volume exceeded advancing volume by a margin of 7 to 2. The sharp losses on firmly higher volume constituted another "distribution day" in both exchanges. In recent weeks, it was the sixth day of institutional selling in the Nasdaq and the fifth in the NYSE. A strong market can typically absorb a few days of higher volume selling, but the presence of five or more within a month usually spells trouble for uptrends, especially fledgling ones.
From time to time, we remind traders about the importance of continually searching for industry sectors showing relative strength or weakness to the broad market. Doing so often enables one to find profitable trading opportunities regardless of the overall market trend. A great example of this was found in the Gold Index ($GOX), which impressively ignored yesterday's broad-based losses and rocketed 6.7% higher. Spot gold zoomed to a new 20+ year high of approximately $850 per ounce, causing the StreetTRACKS Gold Trust (GLD) to correspondingly break out to a new high as well. Our long position in the Market Vectors Gold Miners ETF (GDX), comprised of a basket of individual gold mining stocks, enjoyed a 7.4% rally yesterday. The daily chart below shows the positive price action GDX has been exhibiting since our December 26 entry. The dashed horizontal line marks our profit target, which is a probe above resistance of the November 14 high:
Presently, our GDX position is showing a marked to market gain of 3.7 points. Showing strength in the pre-market, it is poised to open near our original profit target of $49.84. As such, we plan to sell into strength shortly after the open. Because of the low volume and indecision during the holiday period, we have only been carrying one open position. However, the profit from just GDX probably worked out much better than attempting to navigate the market's recent chop would have.
Along with gold, spot crude oil rose to a new record high yesterday. A few days ago, we pointed out the bullish setup in the U.S. Oil Fund (USO), which was consolidating at its prior high. Yesterday's strength led to our anticipated breakout in USO, although much of the gain was the result of an upside opening gap. The daily chart of USO below shows the breakout:
Prior resistance always becomes the new support after the resistance is broken. Therefore, the horizontal line shown on the chart above should now provide price support to USO on any pullback. The closely correlated Oil Service HOLDR (OIH) has been consolidating in a tight range for the past week and is also ready to breakout to a new high.
If OIH rallies above yesterday's high, we plan to buy. Regular subscribers to The Wagner Daily should note our detailed trigger, stop, and target prices for the OIH setup in today's issue. Aside from gold and oil, we presently see no other ETFs with overly bullish chart patterns. The PowerShares Clean Energy (PBW) is one possible exception. Conversely, numerous ETFs are starting to look tempting on the short side. We'll be ready to pounce on those too, but we are now patiently waiting for a short-term rally into resistance of prior support levels that were recently broken. Selling short near current levels does not carry a very attractive risk/reward ratio, but waiting for an eventual bounce that fizzles out does.
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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:
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:Last week's shortened trading session was marked with some volatility, but ended generally lower. The trading pattern that developed was still useful in terms of our trend analysis. As you can see on the annotated charts of the Market Segment ETFs in this week's report, several ETFs completed "swing high" formations that were lower than the preceding highs. We will be watching the prior lows from December as potential support next week. The small cap Russell 2000 (IWM) briefly pushed into the ascending trend mid-week, but weakened quickly. Watch out for continued choppiness and indecision in the market until the new year.
Just as the bears were trapped in the previous week's strength, the bulls quickly found themselves on the run last week. Nevertheless, we can adjust our trading strategies accordingly, just as long as we recognize the non-committal condition of the current market. One thing is for sure; we can depend on regular events such as earnings season, fed meetings, and even "triple witching" options expiration days to move the market and provide false signals. Real strength for the week was found in Oil Services (OIH), Energy (XLE), US Oil (USO), Clean Energy (PBW), and Gold (GLD)/Silver (SLV). Looking especially bearish is Pharmaceuticals (PPH), Financials (XLF), and Consumer Discretionary (XLY). The Euro Currency (FXE) took a real big jump over the Christmas break and has triggered into the "ascending trend" list with solid momentum.
Fixed-income (bond) ETFs edged higher to nearly unchanged from their recent triggers. Prices are forming lower "swing highs," which is a bit bearish. Only the Corporate Bonds (LQD) is in the "descending trend" list.
The International ETFs were mixed. Canada (EWC) is characterized as extremely choppy and is now back on the "ascending trend" list. It should not surprise us if EWC suddenly reverses lower and heads for stops again. Europe (FEZ) triggered to the descending trend in the previous week, bounced from support, and is now rallying to the middle of a range. FEZ has also been identified as having a very choppy trading pattern. India (INP) continues to show nice relative strength amidst a shaky U.S. market.
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. 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 and other upcoming events, please visit the Upcoming Trading Seminars web page.