Divergence – (XLK) (SCO)- The Wagner Daily
The Wagner Daily – October 20, 2011
Concise technical analysis and picks of the leading global ETFs
Commentary:
Stocks gave back most of Tuesday’s gains on mixed volume yesterday. Higher beta issues took the brunt of the selling as both the Nasdaq and the small-cap Russell 2000 fell just over 2.0%. The S&P MidCap 400 fell 1.6% while the S&P 500 shed 1.3%. The Dow Jones Industrial Average showed the most strength on the day as it closed lower by a modest 0.6%.
Market internals ended the session mixed. Volume rose on the Nasdaq by 2.5% but fell on the NYSE by almost 12.0%. However declining volume topped advancing volume on both exchanges. On the NYSE the spread ratio ended the day at a minus 5.2 to 1 and on the Nasdaq at a minus 3.1 to 1. Because of the higher volume the Nasdaq posted both a bearish reversal and distribution day. There was clearly a divergence between the Nasdaq and the NYSE yesterday.
The S&P Select Technology SPDR ETF (XLK) gapped down and formed a reversal candle yesterday on a significant spike in volume. The fact that this burst of selling came on the heels of an accumulation day in the market does not bode well for XLK. A move below the two day low of $25.27 could provide a shorting opportunity in this ETF.
Yesterday, on a big spike in volume, the ProShares UltraShort Dow Jones AIG Crude ETF (SCO) formed a reversal candle as it undercut the 200-day MA and rallied to close near session highs. A volume fueled move back above the two day high of $53.95 could provide a buy entry trigger for this inverse ETF.
The market provided mixed signals yesterday as the Nasdaq diverged from the DJIA and the S&P 500. Given this divergence it is quite possible that we could see a pullback in the Nasdaq but sideways/rally action elsewhere. Caution is warranted in this choppy environment.
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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