A positive reaction to the quarterly earnings report of semiconductor giant Intel Corp. sparked a broad-based rally yesterday, enabling all the major indices to zoom back above their 50-day moving averages. Stocks gapped substantially higher on the open, then built on their gains throughout the entire session. The Nasdaq Composite raced 2.8% higher, the S&P 500 2.3%, and the Dow Jones Industrial Average 2.1%. The small-cap Russell 2000 and S&P Midcap 400 rallied 3.1% and 2.9% respectively. Buying programs in the final ninety minutes of trading comprised nearly half of the day's gains, and helped stocks finish at their intraday highs.
Total volume in both the NYSE and Nasdaq swelled 11% above the previous day's levels, causing the S&P 500 and Nasdaq Composite to score their second straight "accumulation day." Market internals were quite strong, indicating the market's rally penetrated into just about every industry sector. Advancing volume exceeded declining volume by more than 6 to 1 in both exchanges. Although trading still failed to rise above 50-day average levels, it's positive that the past two days of gains have been accompanied by higher volume. Institutions are stepping back into the market, so I suspect it won't be long before turnover moves back to average levels.
When the main stock market indexes fell below support of their four-week uptrend lines and 50-day moving averages on April 11, it changed our intermediate-term bias from bullish to neutral. However, we also said it was too early to declare the new intermediate-term uptrend as being dead. Because lighter volume accompanied the April 11 sell-off, we were not convinced the bears had regained control yet. The following day, stocks dipped lower again, but turnover dried up to its lightest level of the year. With such minimal sell-side volume, we reasoned it would not require much buying pressure to re-ignite the bullish bias. That's what has happened over the past two days, both of which saw the major indices advance on higher volume.
Yesterday's strong session pushed the main stock marked indexes back up to their prior ranges of consolidation that followed the April 1 breakout. The April 11 - 14 weakness undoubtedly shook out the "weak hands" who were looking for a good excuse to sell their long positions. As such, the market now has less overhead supply (price resistance) to contend with. This increases the odds of stocks breaking out to new April highs in the coming days. The pivotal resistance levels of each of the major indices is clearly defined with their respective highs of their early April consolidations. Take a look at the daily chart of the Dow, for instance, which has a well-defined band of horizontal price resistance just overhead:
The area between 12,733 to 12,767 is a pivotal band of resistance for the Dow. Both the S&P 500 and Nasdaq Composite have similar chart patterns. For the S&P, pivotal resistance is in the area of 1,386 to 1,396. For the Nasdaq, watch the 2,391 level. I suggest setting price alerts for each of these levels on your trading software, as a solid rally above these levels could position the market for substantial gains in the intermediate-term.
Though we're certainly not expecting the main stock market indexes to move back to their 52-week highs, the market is indeed presenting us with a tradeable bear market rally. I suggest taking advantage of the strength while it lasts. Prior to yesterday, the best ETF setups were in specific sectors such as oil, basic materials, and alternative energy. But the better than expected earnings report from Intel enabled strength to spread to the tech sectors as well. With broader-based strength now hitting the markets, your odds of profitably trading the long side are much better. ETFs that showed relative strength or consolidation patterns during the market's recent pullback should be the first to break out to new highs in the coming days. We're now long three positions, two international ETFs and one alternative energy ETF, each of which is showing a solid unrealized gain. Current positions are: iShares Mexico (EWW), iPath India Index (INP), and PowerShares Clean Energy (PBW). Given the institutional buying of the past two days, we're now more comfortable deploying additional capital as well. As always, we'll send an Intraday Trade Alert to subscribers of The Wagner Daily if/when we enter any new ETFs with a positive risk/reward ratio. Trade what you see, not what you think!
If you wish to learn about Morpheus Trading Group's ETF trade entries on the same day they occur, sign up for a free trial to The Wagner Daily or other MTG services by clicking here (limit one per household). Also, remember that all previously published issues of both The Wagner Daily and The Wagner Weekly are available in the MTG archives. If you are new to our services or wish to broaden your knowledge of ETF trading or our general trading style, we recommend you browse the archives because it is educational and free! Click here to visit the Wagner Daily archives or here to visit the Wagner Weekly archives.
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Morpheus Trading Group's Founder and Portfolio Manager, Deron Wagner, is proud to present the third of his live video interviews that was recorded at the New York Traders Expo in February 2008. Click here to view the latest video interview (less than 3 minutes long) and learn why Wagner thinks you must first consider the volatility of an ETF in order to choose a position size that matches your risk profile. Click here to view Wagner's live video interview regarding inversely correlated ETFs. Click here to view Wagner's interview on non-correlated ETFs. If you missed Wagner's February presentation at the New York Traders Expo, don't fret. We're pleased to announce that Wagner has been invited to speak at the upcoming Los Angeles Traders Expo from June 18 - 21, 2008. Click here for details of this and other upcoming events. We look forward to meeting you at our next event in California! |
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:With the exception of last Thursday's bounce, the broad-based indices deteriorated the whole week, cumulating in a large decline on Friday. The Market Segments are now evenly split in the ascending and descending trend lists. Nasdaq 100 (QQQQ) is the only one holding on to minor gains. Although upward momentum shifted many ETFs to the "ascending trend" earlier this month, our bias is solidly neutral. The other Market Segments on the "ascending trend" list are quickly being tested to reverse back to the descending trend. This would cause these ETFs to be characterized as being choppy, and participation in the descending trend should be limited and be taken with caution. The week's action caused many ETFs to form "swing high" resistance levels at last Monday's highs.
The majority of the Industry Sectors were weak. The only sectors that remain bullish are Oil Services (OIH), US Oil (USO), Natural Gas (UNG), and Energy (XLE). One could argue that Biotechs (BBH), Pharmaceuticals (PPH), and Healthcare (XLV) were relatively stronger due to their consolidation patterns, and we're watching for further strength in the biotechs. Aerospace (PPA) also consolidated and is trading above its descending trend channel. We always stalk ETFs in the "descending trend" list to anticipate a long entry sometime in the future. In the case of PPA, the Reversal Stop (S2) is also our entry to the ascending trend. For those who sold short PPA on its entry to the descending trend, the current gain is 13%, while the S2 is locking in an 8% gain since our November 2007 entry trigger.
The fixed-income (bond) ETFs generally edged higher for the week. The bellwether mid-term bond (IEF) is keeping pace with the ascending trend. The long term bonds (TLT) is moving well also. The short term bond (SHY) and Corporate bond (LQD) trail behind in relative strength.
Weakness in the domestic markets also spread to the International sector. Only Brazil (EWZ) and Taiwan (EWT) held up a little better. China (FXI) initially looked promising, but fizzled with the U.S. markets on Friday. The EWT chart illustrates a nice example of risk and reward, relative to the current price. If EWT was entered in the $15 area, and our S2 risk currently is $0.50 away (or about 3.4%), then a two times risk is approximately $1 or $16 share price. A 2.5 times risk is $1.25 or $16.25, and a 3 times risk is $1.50 or $16.50 price. At times, it may be prudent to include reward strategies or "targets" in your own trading plan. A 2.5 and 3 times reward relative to risk is widely advocated in industry and with many professional traders. Currently, EWT trades at $16.47.
Alert of imminent reversal to the upside: IWMClick 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.