Stocks followed up last Friday’s substantial losses with a round of modest gains yesterday, though the overall tone of the session was one of indecision. After moving higher in the first hour, the major indices reversed to test their intraday lows, but a mild wave of buying in the final hour lifted the broad market back into positive territory. The S&P 500 rose 0.4%, as the Nasdaq Composite and Dow Jones Industrial Average registered matching gains of 0.3%. The small-cap Russell 2000 and S&P Midcap 400 indices advanced 0.4% and 0.1% respectively. All the main stock market indexes closed near their intraday highs.
Turnover swelled across the board. Total volume in the NYSE was 105% greater than the previous day’s level, while volume in the Nasdaq similarly increased 104%. Given that last Friday’s session closed three hours early, it was not surprising that volume levels were sharply higher. But even factoring that out, the pace of trading was still more active than in recent days. Turnover in the NYSE, for example, exceeded its 50-day average level for the first time since November 4. Although Nasdaq volume was slightly lighter than average, it was the highest of the past five days. As such, the market’s gains on stronger volume caused both the S&P and Nasdaq to register a bullish “accumulation day,” indicative of a bit of buying amongst mutual funds, hedge funds, and other institutions. However, market internals were not that hot. In both exchanges, advancing volume was only roughly on par with declining volume.
Last week, we pointed out a potential buy setup in iShares Nasdaq Biotech (IBB), which was consolidating at its 50-day MA and poised to break out above an 11-week downtrend line. Though the setup has not yet triggered for buy entry, it remains on our radar screen this week. A rally above its two-day high, above the $79 area, will correlate to a breakout above its downtrend line, prompting us to buy it. Take a look:
When discussing IBB last week, we also said we were looking for a pullback entry into S&P Healthcare SDPR (XLV). Since then, it has retraced slightly off its highs, and we will consider a buy entry into XLV on a pullback to its rising 20-day exponential moving average, circled on the chart below:
While the major indices moved slightly higher yesterday, one sector that greatly lagged the recovery was Retail. The S&P Retail SPDR (XRT) showed relative weakness by falling 1.2%, closing below its 50-day MA and 5-month uptrend line in the process. If the broad market experiences weakness in the coming days, the Retail sector may provide near-term short selling opportunities. Below is a daily chart of XRT:
The Oil Service sector is another industry showing clear relative weakness to the broad market right now. The Oil Service HOLDR (OIH) broke support of a 5-month uptrend line last week, and its 20-day exponential moving average has crossed below the 50-day moving average. That convergence now acts as resistance just above the high of the past five days. Again, only in the event of further broad market weakness, OIH could be considered for short sale entry; all bets are off for a short entry if the major indices build on yesterday’s accumulation. Here’s the daily chart of OIH:
The S&P 500 has clearly defined itself within a sideways range over the past three weeks. 1083 is the lower channel support of that range, while 1113 marks the upper channel resistance. Furthermore, the index has held and closed above support of its 20-day exponential moving average in each of the past two days. The recent trading range of the S&P 500 is shown on the daily chart below:
As long as the S&P remains within the confines of the channel shown above, entering new positions on either side of the market could be tricky. Overall, the best bet may be to avoid trading in the broad-based ETFs such as S&P 500 SPDR (SPY) and Nasdaq 100 Tracking Stock (QQQQ), and focus instead on ETFs that have been “out of sync” with the broad market. ETFs such as IBB, which is setting up to break out above a downtrend line, or OIH, which has just broken down below a key uptrend line, may be less prone to being affected by broad market direction if they start to move.
Yesterday, we made a judgment call to sell our position in the inversely correlated UltraShort Russell 2000 ProShares (TWM), locking in a small gain of 1 point. We originally entered the position after the Russell 2000 failed to get back above its 50-day MA in mid-November. However, the index showed a lot of relative strength into yesterday’s close, and finished with a bullish “hammer” formation. After scanning the market extensively, our assessment is that money may be starting to flow back into small-caps, which could cause the Russell to make another run at its 50-day MA. Rather than letting the trade turn into a loser, we decided to take what the market gave us, and lock in a 1-point gain on TWM. Today, if the ETF doesn’t quickly move right back down, we may also close our short position in Regional Bank HOLDR (RKH) for a scratch. Though we expected the financials to bounce sooner or later, yesterday’s strength in the sector could spark a short squeeze. We also don’t like that the financial ETFs just broke support of their uptrend lines last Friday, but have immediately snapped back above that resistance. If we decide to cover RKH, we’ll promptly send an Intraday Trade Alert to regular subscribers.
Open ETF positions:
Long – FCG, DAG
Short (including inversely correlated “short ETFs”) – RKH
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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