The stock market staged a much-needed relief rally yesterday, as volume picked up across the board. After opening flat, the major indices chopped around in a sideways range throughout most of the session, but buyers stepped up to the plate in the final ninety minutes of trading. The Nasdaq Composite advanced 2.3%, the S&P 500 1.7%, and the Dow Jones Industrial Average 1.4%. Small caps took center stage, enabling the Russell 2000 Index to zoom 3.7% higher. The S&P Midcap 400 climbed 2.2%. Trending steadily north into the close, all of the major indices closed at their intraday highs.
Notably, higher turnover in both the NYSE and Nasdaq confirmed yesterday's broad-based gains. Total volume in the NYSE swelled 12%, while volume in the Nasdaq rose 6% above the previous day's level. The higher volume gains enabled both the S&P 500 and Nasdaq Composite to score a bullish "accumulation day," a rare event these days. The only slight negative was that relative weakness in a few industry sectors, such as energy, prevented market internals from being overly positive. In both exchanges, advancing volume exceeded declining volume by an approximate ratio of just 5 to 2.
Aside from the various financial ETFs, which merely bounced from their multi-year lows and extremely "oversold" conditions, one of yesterday's biggest ETF gainers was the Biotech HOLDR (BBH), which surged 3.0% higher. From an educational perspective, the rally in BBH was a great example of the most basic tenet of relative strength trading; ETFs that hold firm when the broad market is dropping are typically the first ones to motor much higher when the main stock market indexes eventually rally. Our BBH position, which we bought on July 2, is now showing an unrealized gain of nearly four points, but it's the relative strength that BBH has been exhibiting for the past month that tipped us off early on.
We initially became aware of the early relative strength in BBH because of its outperformance in June. Last month, the benchmark S&P 500 Index tumbled a whopping 8.6%, but BBH actually gained 1.9% during the same period. Then, on July 1, the S&P 500 bounced just 0.4%, but BBH broke out and rallied 2.1% that day. Over the next three days, the S&P 500 lost 2.4%, but BBH continued to show relative strength by pulling back just 1.0%. Based on this pattern of relative strength to the broad market that BBH had been exhibiting for the past month, it was therefore not surprising that BBH gained 3.0% to the 1.7% gain in the S&P 500 yesterday.
As detailed in my new book, Trading ETFs: Gaining An Edge With Technical Analysis, one of the best ways to spot ETFs with relative strength to the broad market is through the use of "percentage change" charts. By overlaying tickers of various industry sector ETFs with the S&P 500, one can quickly and easily spot divergent patterns of relative strength, well before the "me too" crowd. To illustrate this, take a look at the chart below, a 5-week "percentage change" chart in which BBH is overlaid with the S&P 500:
Notice how the relative strength of BBH started to become apparent in mid-June. At that time, BBH began trending sideways to higher, while the S&P 500 continued moving lower. From that point forward, notice how each small bounce in the S&P 500 led to a much larger gain in BBH. Based on its current pattern of bullish divergence, it's easy to see that BBH will probably surge much higher if the S&P 500 now manages to stage a decent rally in the near-term. If, however, the S&P 500 continues sideways to lower, BBH will probably hold firm, or perhaps still continue slightly higher. If you have not already doing so, we suggest setting up overlay charts on your trading software, such as the one above, that will enable you to quickly spot divergent trends across the major industry sector ETFs. By getting into the habit of scanning these charts on a daily basis, you will soon learn to detect relative strength (and weakness) with ease. . .well before the "me too" crowd. Looking at BBH by itself, the daily chart below shows yesterday's strong breakout above key price resistance:
In the last paragraph of yesterday's Wagner Daily, we said, "For minimal risk with maximum profit potential, consider buying only the sector ETFs showing relative strength to the broad market, while simultaneously selling short those with recent relative weakness. On the long side, we like the Biotech HOLDR (BBH), any of the iShares T-Bond ETFs (SHY, IEF, or TLT), StreetTRACKS Gold Trust (GLD), and/or Market Vectors Gold Miners (GDX). On the short side, we like Oil Service HOLDR (OIH), Market Vectors Steel (SLX), and Market Vectors Agribusiness (MOO)." Even though the broad market zoomed higher yesterday, with biotechs leading the way, OIH, SLX, and MOO all closed lower. This enabled us to profit not only from our BBH position, but also from our bearish position in the UltraShort Oil and Gas ProShares (DUG). Because of the relative strength we noticed in the Russell 2000 in the morning, we also sent an Intraday Trade Alert to subscribers, mentioning the idea of buying Ultra Russell 2000 ProShares (UWM) for just an intraday trade. Those who took advantage of that momentum trade enjoyed an intraday gain of approximately 7%.
Overall, it's way too early to tell if yesterday's broad market rally will fizzle out in a few days, or if it was possibly the start of a significant bottom. Follow-up market action over the next few days will give us a better clue. Nevertheless, the beauty of relative strength ETF trading is that it really doesn't matter either way! By simultaneously buying ETFs with relative strength and selling short those with relative weakness, your chances of profitability are significantly increased, while your risk of capital loss is greatly decreased.
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.
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, we are presenting you with an educational explanation of an actual trade we recently entered and is showing a large unrealized gain. It was a purchase of Celgene (CELG). Below is a daily chart detailing the setup:
Let's see how CELG subsequently played out:
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:The Market Segment ETFs closed the week mostly lower, with small-caps (IWM) and mid-caps (MDY) accelerating to test and break key support levels. The sharp decline in the major indices triggered the industry-accepted definition of a "Bear Market," which is 20% below the 52-week highs. Regardless of the "official" definition, MTG's ETF Trend Tracker has always been at least one step ahead of the broad market. The Dow Dividend (DVY) has been in the "descending trend" list the longest, and has a short sale gain of just over 30% since triggering in mid-October, 2007. In less than a month, most of the tickers that triggered into the "descending trend" in June have already gained around 7% on the short side.
Biotechs (BBH), which we highlighted as having relative strength in last week's commentary, broke out above near-term resistance and is heading higher to test the March highs. Related ETFs such as Pharmaceuticals (PPH) and Healthcare (XLV) didn't do as well, but at least they didn't head lower along with the rest of the industries. XLV is stabilizing right at the March lows, and we are watching it closely to set up a buy long position trade. Its MTG Stop (S1) is already at the Trigger level, which is a break even trade for a partial position if it triggers next week. However, from the way XLV is acting, it probably won't be setting up a long position for at least 3 more weeks.
The Bond (fixed-income) ETFs held steady, with the exception of Corporate Bonds (LQD), which posted new multi-year lows. There's apparently not much confidence in corporate industry bond prices, sending yields higher to entice the less informed and the not smart money. The other T-Bond markets are close to hitting their respective Reversal triggers (S2).
Our domestic markets were closed last Friday (and ½ day Thursday), but the rest of the world kept on trading. Asia traded higher, Europe mostly lower, and Latin America was nearly unchanged. Take your pick of the International ETFs; they all headed lower for the week. Maybe one bright spot was in the general Europe (FEZ), which was nearly unchanged. When ETFs are mostly weighted on one side of the trend, MTG is always on alert for Reversals. Trend reversals, bounces, or whatever you want to call them, are opportunities for everyone to BUY. We have demonstrated this for years and years, and it has seldom failed. A preview of what's to come in our future reports is additions of targets, color coding, trade setups, and much more.
Our goal is for subscribers to become successful traders and investors. Using the ETF Trend Tracker is the dynamic way to make consistent money in any market over the long run. Traders and investors alike need consultation the most when markets are difficult. Everyone's a genius when the markets are going up, right? Take ownership of your portfolio and schedule a consultation session with one of the MTG professionals. MTG is offering a bear market special discounted consultation rate of $120 per half hour through July 31, 2008. Just call or e-mail us to set up an appointment. Learn how to approach trades during any market condition, and gain insights into using the ETF Trend Tracker for long-term growth. Learn mid-trend entry strategies, how to control risk, portfolio management, and trade execution, all personalized to you. It could make the difference from being "lucky" to becoming a consistent market investor profiting from trade after trade. Only one right trade idea from the consultation will make up for your fees, but you can use the same strategy to do it over and over again!
Alert of imminent reversal to the upside: IEF, SHYClick 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.