Stocks followed up the previous day’s breakout to new 52-week highs with a relatively quiet session of mostly sideways trading. The broad market spent most of the day drifting in modestly negative territory, but a last-minute wave of buying helped most of the major indices finish slightly higher. The S&P 500 gained 0.4% and the Dow Jones Industrial Average rose 0.5%. The S&P Midcap 400 edged 0.3% higher, but both the Nasdaq Composite and small-cap Russell 2000 showed slight relative weakness by closing at the flat line. Each of the main stock market indexes finished at its intraday high.

Total volume in the NYSE was on par with the previous day’s level, while volume in the Nasdaq ticked 9% lower. Considering stocks were trading slightly lower throughout most of the day, the flat to lighter volume was actually a good thing. Higher turnover on a sideways days that follows a breakout is often indicative of stealth selling into strength (aka “churning”). Conversely, lighter volume with low volatility price action suggests the bulls took a rest, but the bears remained at bay.

In the October 14 issue of The Wagner Daily, we illustrated that U.S. Oil Fund (USO) was setting up to potentially break out above resistance of a lengthy trading range. Specifically, we said, “For the past four months, crude oil futures (and USO) have been stuck in a choppy, sloppy sideways range. However, the sticky stuff is once again testing upper channel resistance of that range. If it finally breaks out this time, it could lead to a very high-momentum ascent in the short-term. Typically, the longer a base of consolidation that precedes the breakout, the more powerful the eventual breakout.” One day later (yesterday), USO indeed broke out above its range, as higher than average volume confirmed the move. The daily chart of USO is shown below:


As per our original plan, we bought USO when it rallied above the dashed, horizontal line on the chart shown above. If we continue to see rotation into the crude oil futures market, the corresponding gain in USO could become quite substantial because of the length of time it had been stuck in a range. If you missed yesterday’s entry into USO, it could be bought on any slight pullback in today’s session, just as long as it holds support of the breakout level.

Yesterday, precious metals pulled back from their recent ascent, prompting us to lock in an average gain of 17% on our position in Gold Double Long (DGP). By no means does gold appear to be in trouble, as yesterday’s retracement was simply the start of a normal, healthy pullback. However, as recently discussed, we opted to trail a tight stop in order to maximize gains on this run, rather than sit through a pullback. This decision was based largely on the fact that gold and silver have a nasty history of retracing steeper than they should. Nevertheless, we will definitely continue to monitor the pullback in gold, and are fully prepared to re-enter the position. Ideally, we’re looking for a retracement down to new support of its recent breakout level, which roughly converges with the 20-day exponential moving average. This is shown on the daily chart of DGP below:


Although the S&P, Nasdaq, and Dow all broke out to new highs of the year two days ago, one index that didn’t follow suit was the small-cap Russell 2000. Since bouncing off support of its 50-day MA on October 2, the rally in small-caps has lagged the rest of the broad market. Below is a daily chart of iShares Russell 2000 (IWM), a popular ETF proxy for the Russell 2000 index:


On the surface, the near-term relative weakness in IWM may seem inconsequential. However, this is something to pay attention to because broad-based market rallies are frequently led by small and mid-cap stocks. When money stops flowing into aggressive growth stocks, most of which are typically small and mid-cap issues, it indicates a diminishing demand for risk amongst market participants. A willingness to continue assuming risk, of course, is the basis behind the continuation of bull markets. It’s possible the laggard action in the Russell 2000 could simply be a very short-term aberration that corrects itself within the next several days. But if the Russell doesn’t soon catch up to the rest of the broad market, we view it as a yellow warning flag to the bulls.

Open ETF positions:

Short – (none)

NOTE: Regular subscribers to The Wagner Daily receive daily updates on the open positions above, as well as new ETF trade setups, including trigger, stop, and target prices. Intraday Trade Alerts are also sent via e-mail and/or mobile phone text message on as-needed basis.

Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (, which he launched in 2001. Wagner’s new book, Trading ETFs: Gaining An Edge With Technical Analysis, was published by Bloomberg Press in August, 2008. Wagner also appears on his best-selling video, Sector Trading Strategies (Marketplace Books, June 2002), and is 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. He is also a frequent guest speaker at various trading and financial conferences around the world.

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