Stocks followed up the previous day’s rally with a round of modest, broad-based gains in a mixed-volume session. After opening higher, the major indices fell back to the flat line at mid-day, but the broad market grinded its way back to positive territory shortly thereafter. The rest of the day was marked by tight, range-bound trading that persisted into the close. The Nasdaq Composite finished 0.6% higher. The S&P 500 and Dow Jones Industrial Average registered matching gains of 0.4%. The small-cap Russell 2000 rose 0.7%, as the S&P Midcap 400 similarly advanced 0.6%. All the main stock market indexes closed near their intraday highs.
Total volume in the NYSE was 6% lighter than the previous day’s level, while turnover in the Nasdaq ticked 2% higher. When stocks were trending lower in the morning, turnover in both exchanges was tracking substantially higher. Then, as stocks stabilized and unconvincingly attempted to move higher, volume levels receded. Such an intraday volume pattern is negative, as it points to bearish “churning,” a scenario that occurs when institutions stealthily sell into strength near the highs of a recent move. Since yesterday was basically a consolidation day, lighter volume in both exchanges would have actually been better.
In yesterday’s commentary, we highlighted Tuesday’s pullback in the U.S. Dollar Bull Index (UUP), and suggested the short-term correction provided a low-risk, secondary buy entry for traders who missed the initial breakout. Although one might have expected it to move lower for another day or so, and at least test its 20-day moving average, UUP gapped higher on yesterday’s open, then zoomed to close above the previous day’s high. As such, the two-week consolidation, just a “correction by time,” may soon propel UUP to a fresh high within its intermediate-term uptrending channel. Notably, the stock market held firm despite yesterday’s resumption of strength in the greenback.
In the February 17 issue of The Wagner Daily, we said, “The main stock market indexes have already moved to levels that now force savvy traders to question the reward-risk ratio of new long entries at current levels. With resistance of their early February ‘swing highs,’ the 50% Fibonacci retracements, and even the 50-day moving averages just overhead, it’s going to take a lot more power, in the form of higher volume, for stocks to blast through all those levels. While there may be additional upside in the coming days, such as a rally to the 61.8% Fibonacci retracement levels, it’s a negative reward-risk ratio to buy when the potential losses are greater than the likely upside gains in the near-term. If anything, a test of the 61.8% Fibonacci retracements and 50-day moving averages may provide ideal short entry points for the near-term.” Because ysterday’s subsequent gains now put the major indices even closer to their 61.8% Fibonacci retracements and 50-day moving averages, that same analysis of new long positions being a negative reward-risk ratio is even more significant going into today’s session.
After scanning hundreds of ETF charts last night, we didn’t find anything that thrilled us on the long side. A select few ETFs have already broken out above ranges of consolidation, but we’re not interested in chasing prices when the major indices are coming into key resistance levels. Other ETFs have yet to make substantial upward progress off their lows, but we’re certainly not excited about buying those because they’re exhibiting clear relative weakness to the broad market. Therefore, we believe the best plan of action right now, other than perhaps “dipping a toe in the water” with light exposure on the short side, is to patiently sit on the sidelines, waiting for the market’s next move.
If looking for a new short trade, we do not recommend selling short into strength of a market that is grinding higher every day. Such action makes it difficult to remain in short positions, even if entered at proper levels of resistance. Instead, consider selling short one of the broad-based ETFs (SPY, DIA, QQQQ) on the first day the broad market gaps down to open substantially below the previous day’s close. Then, a tight stop could be placed just above that morning’s high, thereby providing a positive reward-risk ratio for a quick, momentum-driven short trade (perhaps even a daytrade). For trades with a short-term time horizon, the inversely correlated “short ETFs” provide a nice alternative to selling short the broad-based ETFs.
Open ETF positions:
Long – UUP
Short (including inversely correlated “short ETFs”) – (none)
Deron Wagner is the Founder and Head Portfolio Manager of Morpheus Trading Group, a capital management and trader education firm launched in 2001. Wagner is the author of the best-selling book, Trading ETFs: Gaining An Edge With Technical Analysis (Bloomberg Press, August 2008), and also appears in the popular DVD video, Sector Trading Strategies (Marketplace Books, June 2002). He is also co-author of both The Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader (McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and Yahoo! FinanceVision. Wagner is a frequent guest speaker at various trading and financial conferences around the world, and can be reached by sending e-mail to deron@morpheustrading.com.
DISCLAIMER: There is a risk for substantial losses trading securities and commodities. This material is for information purposes only and should not be construed as an offer or solicitation of an offer to buy or sell any securities. Morpheus Trading, LLC (hereinafter “The Company”) is not a licensed broker, broker-dealer, market maker, investment banker, investment advisor, analyst or underwriter. This discussion contains forward-looking statements that involve risks and uncertainties. A stock’s actual results could differ materially from descriptions given. The companies discussed in this report have not approved any statements made by The Company. Please consult a broker or financial planner before purchasing or selling any securities discussed in The Wagner Daily (hereinafter “The Newsletter”). The Company has not been compensated by any of the companies listed herein, or by their affiliates, agents, officers or employees for the preparation and distribution of any materials in The Newsletter. The Company and/or its affiliates, officers, directors and employees may or may not buy, sell or have positions in the securities discussed in The Newsletter and may profit in the event the shares of the companies discussed in The Newsletter rise or fall in value. Past performance never guarantees future results.
Charts created by TradeStation (tradestation.com).
© 2002-2010 Morpheus Trading, LLC
Reproduction without permission is strictly prohibited.
