The broad market followed through on the previous afternoon's bearish reversal, causing the major indices to close substantially lower. Stocks gapped lower out of the starting gate, then drifted lower throughout the entire day. The S&P 500 shed 0.9%, the Nasdaq Composite 1.0%, and the Dow Jones Industrial Average 1.5%. As it has done for at least the past month, the S&P Midcap 400 Index continued to show impressive relative strength by slipping just 0.2%. The small-cap Russell 2000 lost 0.4%. A bounce in the final fifteen minutes of trading lifted the main stock market indexes off their worst levels of the day, though such late-day buying at the conclusion of a firmly negative day is often the result of short covering by intraday traders.
Turnover was mixed. Total volume in the NYSE rose 7% above the previous day's level, while volume in the Nasdaq conversely eased 10%. The significant higher volume losses in the NYSE caused the S&P 500 to suffer another bearish "distribution day." Since it was the fifth such day of institutional selling in recent weeks, traders should now be cautious on the long side of the S&P and Dow. A healthy market can withstand a few days of selling by mutual funds and hedge funds over a four-week period, but the presence of more than four "distribution days" often spells an end to a streak of bullish momentum. Still, it's positive that the Nasdaq's loss occurred on lighter volume. Since the Nasdaq has been the leading index on the way up, its performance is more important than that of the laggard S&P and Dow. In both exchanges, declining volume outpaced advancing volume by a margin of 5 to 2.
UltraShort Financials ProShare (SKF), which we analyzed extensively in yesterday morning's commentary, followed through nicely to the upside. Leveraged and designed to move at twice the percentage change of the underlying financial sector, and in the opposite direction of the sector, SKF surged 4.4% higher yesterday. As volume picked up, SKF also closed above the high of its recent price consolidation. Resistance of its 50-day MA, just above yesterday's high, will be the next formidable challenge. However, we think odds are good that it breaks out above the 50-day MA this time because it will be the third such test of resistance within the past two months. Each successive test of the 50-MA increases the odds of an eventual breakout above it. The same is true of moving averages of other intervals as well. SKF is already showing an unrealized gain of 4 points since our May 19 entry in The Wagner Daily, but realize it's a volatile ETF. Our price target is substantially higher.
StreetTRACKS Gold Trust (GLD), which mirrors the price of the spot gold commodity, gapped up to close above its 50-day MA yesterday. The last time GLD closed above its 50-day MA was on April 16 of this year, but it immediately fell back below its 50-day MA the following day. We'll be closely monitoring price action of GLD over the next few sessions. If it holds in a tight, sideways range, it will increase the odds of GLD "sticking" above its 50-day MA and subsequently making another leg up in the intermediate-term. Below is the daily chart of GLD, which is now showing an unrealized gain of 4% (3.6 points) since our May 15 entry:
Also bucking the trend of yesterday's broad-based weakness was the energy sector, which has been on an amazing tear. After the Oil Service HOLDR (OIH) closed just above the high of its multi-week consolidation on May 15, we suggested the setup for a quick, momentum-based buy entry. OIH has gained every day since then, advancing more than 4% (9 points) over the past three sessions. But remember we suggested OIH as merely a short-term play. With crude oil now extended 14% above support of its 50-day MA, it could reverse sharply when the inevitable correction eventually comes. OIH would likely follow suit. As such, if you bought the breakout in OIH, consider using a tight trailing stop to maximize any additional gains while protecting existing profits. We presently would place a trailing just below yesterday's low, which happens to converge with support of the 20-day EMA on the hourly chart. If OIH gaps higher on today's open, a stop could be trailed below the low of the first twenty minutes, in order to protect against a failed gap up.
As it did just over a week ago, the S&P 500 is again testing support of its intermediate-term uptrend line, which began with the March 2008 low. The dashed blue line on the daily chart below marks the uptrend line:
With major resistance of the 200-day moving average just overhead, but support of the intermediate-term uptrend line right at yesterday's low, price action over the next several days is likely to be volatile. Simply put, the S&P 500 is stuck between a rock and a hard place! Be prepared for another tug-of-war between the bulls and bears, as they battle to determine the next direction of the broad market. If the bulls get the upper hand, we could expect the S&P to swiftly move back and close above its 200-day MA. Such action would prove the market's rally off the March lows is still alive and well. But if the bears have their way, the S&P could quickly break support of its intermediate-term uptrend line, as well as the 20-day EMA just below. The May 9 low, around the 1,384 area, would be the next support, followed by the 50-day MA at 1,367. Consider holding back on new position entries until the S&P clearly shows the direction of its next move.
Showing relative weakness to the S&P 500, the Dow Jones Industrial Average has already closed below both its 20-day EMA and intermediate-term uptrend line. The dual failed attempts to move back above its 200-day MA was likely the culprit for the sudden show of bearish momentum in the Dow. Yesterday's break of support is shown on the daily chart below:
Just a one-day close below a trendline does not confirm a definitive break of support, but the Dow could quickly build on its bearish momentum if it closes below yesterday's low. Like the S&P 500, the Dow may find near-term support at its May 9 low of 12,715. Further below, the 50-day MA is at 12,617. With the Dow now showing the most relative weakness of the main stock market indexes, our bearish position in the UltraShort Dow 30 ProShares (DXD), which nearly hit our stop two days ago, should start to move deeper into the plus column. Nevertheless, the Nasdaq is still showing enough strength that we cannot yet be overly bearish on the entire market. Overall, both our near and intermediate-term biases are now neutral to bearish. Until the major indices prove otherwise, we remain under the basic working assumption that the long-term trends remain "down."
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.
Live ETF Trading Seminar with Deron Wagner June 22, 2008 - Los Angeles, California  Shift your ETF trading into high gear in both up and down markets!
For all active traders and investors 
DESCRIPTION
YOU WILL LEARN HOW TO:
Wagner will be presenting an abbreviated version of this seminar (free) at the LA Traders Expo on June 21, but this is your chance to dive in deeper, put all the details together, and pick his brain! If you're already attending the LA Traders Expo from June 18 - 21, Wagner's dynamic ETF workshop is a great way to wrap up your trip. Most importantly, we're quite confident the investment in yourself will pay for itself many times over, within a very short time. Nevertheless, you need to act fast because seating is limited and advance registration is required. Attendance available on a first-come, first-served basis. |
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 Stalk of the Week is:
Because the S&P 500 is at such a pivotal level right now, there is no new Stalk of the Week. We've had quite a profitable run in the MTG Stalk Sheet lately, so we're now focusing on managing existing positions and laying low with new entries for the next day or two.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:As the tug-of-war between the bulls and bears continued, the broad market rallied back last week. The S&P 500 Growth ETF (IVW), S&P 400 Mid caps (MDY), and the Nasdaq 100 (QQQQ) performed best. They all posted new highs and closed near their highs. MDY moved well off its base, and has kept a steady ascending trend since early April. MDY has made just over a 6% gain to date, and outperforms other Market Segments that triggered around the same time. The earliest entry into the "ascending trend" list was QQQQ in late March. Currently, QQQQ has made a 14% gain since the entry, and our MTG Stop (S1) is locking in approximately 10% on this move so far.
Several Industries made very good moves higher last week. However, let's identify some laggards first. Starting out with Regional Banks (IAT) and Financials (XLF), both were relatively flat for the week. The next group is Pharmaceuticals (PPH), Healthcare (XLV) and Biotech (BBH); they underperformed relative to the rest of the other industries. Commodities (DBC) took a rest too, but is near its highs. The remaining industries in the ascending trend all performed well. It's hard to pick out which one did better, or more importantly, which one will do better next week. Still, you may want to take a look at some of the highest gainers on the "ascending trend" list. Currently, Energy (XLE) takes the top spot, and it rewarded shareholders with a nice gap higher to close the week. XLE has made a 23% gain since the February 12, 2008 entry.
The bond (fixed-income) ETFs are having a tough time holding up their prices. There is almost a 2-week cycle of peaks and valleys, but lately those peaks have been lower and lower each time. The long-term bonds (TLT) Reversal stop (S2) was tested again, and may trigger if another round of weakness returns. Corporate bond ETF (LQD) is beating to a different drummer, and has been range bound for several months.
The International sectors generally rallied across the board. Asia, Latin America, and Europe all performed well. Every ETF in the ascending trend is making health gains relative to the amount of time since the trigger date. That's a 100% hit ratio, clearly not a random selection outcome. Back in the spotlight again is Brazil (EWZ), outdistancing gains from other international ETFs by nearly two to one. Currently, EWZ has made over 19% after the April 3, 2008 entry to the ascending trend.
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.
