Stocks closed the week with a fourth straight day of losses last Friday, as the major indices spent the entire session oscillating in a tight, sideways range before finishing moderately lower. The Dow Jones Industrial Average slipped 0.2%, the S&P 500 Index lost 0.4%, and the Nasdaq Composite fell 0.8%. The small-cap Russell 2000 Index and S&P Midcap 400 Index lost 1.2% and 0.6% respectively. A bit of selling pressure into the close caused all the main stock market indexes to settle at their intraday lows. However, it was an inside day, meaning the major indices traded within the respective trading ranges of the previous day.
Turnover eased across the board, as it was a rather apathetic session. Total volume in the NYSE was 14% lighter than the previous day’s level, while volume in the Nasdaq receded 27%. Trading in the Nasdaq fell back below its 50-day average. Volume in the NYSE was also below its 50-day average, as it has been since July 1. In the NYSE, declining volume exceeded advancing volume by a margin of 3 to 2. The Nasdaq adv/dec volume ratio was negative by a little more than 2 to 1.
On August 12, the S&P 500 “undercut” obvious support of its 50-day moving average. We frequently discuss the bullishness of this type of setup when an ETF snaps back above its key level of support the following day. Therefore, going into last Friday’s session, we were looking for the S&P 500 to move back above its 50 day moving average, which would have been a relatively low risk entry point for new long positions. However, in order for the “undercut” to be effective, an immediate move back above the support level is key. As the S&P 500 closed lower on Friday, it remains below its 50-day moving average going into today’s session. As such, a break below the lows of the past two days could lead to another leg down, driven by greater intensity of bearish momentum. But overall, the S&P 500, as well as the rest of the major indices, are now trading near the middle of their intermediate-term ranges. Put another way, stocks enter the new week in “no man’s land.” This is shown on the daily chart of the S&P 500 SPDR (SPY), a popular ETF proxy for the S&P 500 Index:
As the chart above illustrates, the S&P 500 is near the middle of its intermediate-term trading range. It stalled and rolled over last week, after failing to overcome resistance of its June 2010 highs. Still, “swing low” support of the mid July lows is just below the current price of the index. Clearly, there are mixed signals supporting both the bullish and bearish argument in the near term. As such, given the current technical state of the broad market, we believe the best plan of action over the next several days is to be in “SOH mode” (sitting on hands). If the main stock market indexes move back above their highs of the past two days, therefore putting the S&P 500 back above its 50-day moving average, ETFs with relative strength that pulled back last week could be entered with small share size, in anticipation of a resumption of their uptrends. However, entering new positions before that happens may not be advisable. Conversely, new short sale setups may start presenting themselves if stocks fail to hold last week’s lows.
Although the major indices moved lower last Friday, four of the five ETFs in our model portfolio account advanced that day. The iShares 20+ Year T-bond (TLT), Power Shares Agriculture (DBA), U.S. Dollar Bull Index (UUP), and U.S. Natural Gas Fund (UNG) all gained. The inversely correlated Gold Double Short (DZZ) was flat. Showing particular relative strength last week were the fixed income (bond) ETFs. In our August 12 commentary, we said, ” If TLT rallies above yesterday’s high (above resistance of its six week downtrend), it should lead to another leg higher over the next week. A close above the $102.03 level would also represent a fresh, 52-week closing high.” That’s exactly what happened, as TLT finished the week at a fresh, 52-week closing high, and is now poised to make another leg higher in the near to intermediate-term. Take a look:
What do all five of our open ETF positions have in common? Each is an ETF with a low correlation to the direction of the overall stock market. When markets get choppy or indecisive, currency, commodity, and fixed-income ETFs are often the place to be because they are less susceptible to the day-to-day fluctuations of the major indices. Nevertheless, we’re not afraid to take positions in ETFs with relative strength, if market conditions are stable. Two weeks ago, for example, we bought Claymore Global Solar Energy ( TAN) and Market Vectors Indonesia (IDX). However, neither ETF managed to show significant follow-through, so we made a judgment call to sell both positions near the breakeven level last week. We continue to stay abreast of the strongest ETFs in the market, and are continuing to monitor a few that may be potential short candidates if stocks fell hold support near current levels. But for now, we’ll simply focus our efforts on managing our existing open positions for maximum profitability.
| Open ETF positions:
Long – TLT, DBA, UUP, UNG |
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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.
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