Stocks returned from the holiday extended weekend in bullish fahsion. Broad market averages steadily pushed higher throughout the day and recaptured all of last Friday’s losses, closing up more than 1% across the board. The lone knock on Monday’s action is that volume declined on both the NYSE and Nasdaq, but overall, it was a positive response to Friday’s distribution. The small-cap Russell 2000 led the advance closing up 1.8%. The Nasdaq Composite, S&P Midcap 400, and S&P 500 all closed with an average gain of 1.3%. The Dow Jones Industrial Average added 1.1%.
Total volume fell off Friday’s option expiration pace by more than 20% on both exchanges. However, total volume did close at/near its 50-day moving average (on both exchanges), so we can’t just dismiss Monday’s session as a bearish, light volume rally. Market internals were solid on the NYSE, as advancing issues beat declining issues by a three to one margin, and upvolume beat downvolume by five to one.
Last summer there was a rotation of money into energy and financials after a few months of corrective price action. We are beginning to see that same money flow once again, as evidenced by the recent strength in ETFs such as OIH, XLE, and XLF after a two-month correction. Regional Bank HOLDR (RKH) has also formed a bullish pattern of consolidation over the past few months:
RKH printed a double bottom by undercutting the prior swing low in mid-December. The impulsive price action on the rally off the lows confirms that the dip below the low of November 2 was just a shakeout. It now looks to be forming some sort of handle and is buyable on weakness to support of the 20-day EMA. Look for the price action to tighten up over a few days for another potential buy point, as buying the move out above the current range high (around 83.50) may be a bit too obvious.
The PowerShares Commodity Index ETF (DBC) failed a recent base breakout in early January and pulled back to the 50-day MA. The sharp selloff has created a bullish washout, so the next move out could possibly be the one to go.
After gapping down beneath the prior day’s low on Monday morning, DBC put in a bullish reversal and closed back above the 50-day MA on a pick up in volume. DBC is buyable around the 50-day MA and on the move out above the 20-day MA.
Continuing with the energy theme, we are seeing a potential lower level basing pattern develop on the weekly chart of the Natural Gas ETF (UNG) below:
Since breaking above the 10-week MA and a seven month downtrend line in mid-December, UNG has formed a tight-ranged consolidation while holding above the 10-week MA. We also see that the 10-week MA is beginning to slope up, which suggests that a potential intermediate-term trend reversal may be on the way. Look to the weekly charts of JJC, USO, and PGM to get an idea of what to expect for this type of setup. One could establish a small (and very patient) position at/near the lows of the range, especially if there is some sort of bullish undercut below 9.50 that holds up.
Open ETF positions:
Long – PGM, UUP
Short (including inversely correlated “short ETFs”) – EEV
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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