Most of the major indices spent the day chopping around in a narrow, sideways range before closing near unchanged levels. However, notable relative weakness among large-cap tech stocks caused the Nasdaq to lag behind. The S&P 500 advanced 0.1%, the Dow Jones Industrial Average was flat, and the Nasdaq Composite slipped 0.3%. The S&P Midcap 400 registered a respectable gain of 0.5%, but the small-cap Russell 2000 edged 0.1% lower. The Nasdaq finished near the bottom quarter of its intraday range. The S&P and Dow settled just above the middle of their ranges.
Total volume in the NYSE declined 7%, while volume in the Nasdaq was on par with the previous day’s level. The slower turnover in the NYSE prevented the S&P from marking another day of “churning.” However, since the Nasdaq showed relative weakness and closed slightly lower, it would have been better if volume had declined in that exchange as well. Overall, yesterday’s price to volume relationship in the broad market was rather inconclusive.
Just two days after our buy entry into S&P Select Energy SPDR (XLE), the ETF has rallied to set a fresh 52-week closing high. Now that XLE has given us a decent profit buffer, we are raising the stop to near the breakeven level, and will trail it even tighter after marking the low of the next pullback in XLE. The energy ETFs are starting to confirm their recent relative strength, and the sector remains positioned to show leadership in the near to intermediate-term. The “percentage change chart” below compares the performance of XLE to the S&P 500 SPDR (SPY) since the start of the new year:
Our other long position, Semiconductor HOLDR (SMH), continues its steady uptrend since breaking out last month. It’s presently trading near its recent highs, and is still well above its 20-day EMA. However, we may now be starting to see institutional rotation out of the tech arena. Yesterday, for example, leading tech stocks like AAPL, PCLN, GOOG, and AMZN all recorded substantial losses. As such, we’ve tightened our stop in SMH today, just to ensure a small gain can still be locked in if further rotation out of tech continues.
Commodities were one of the leading sectors yesterday, causing the gold and silver ETFs to move above the short-term resistance levels discussed in yesterday’s commentary. The opening strength in the precious metals ETFs presented potential buy points for short-term swing trades. However, one potential “gotcha” that could affect the nice pullback in the gold and silver ETFs is the U.S. dollar. On the chart below, notice the PowerShares U.S. Dollar Bull (UUP) has pulled back to near-term support of its 20-day exponential moving average (EMA), after breaking out above resistance of an extended downtrend line last month:
Since commodities often (not always) move in an opposite direction of the dollar, a resumption of the developing uptrend in UUP could have an adverse affect on the recovery attempt in gold and silver, especially if UUP rallies above its December high. Therefore, traders who bought the recent pullback in precious metals ETFs may wish to maintain tight trailing stops, in order to lock in gains if further strength in UUP pressures commodities in the near future. Furthermore, UUP could even be bought above the high of the past three days (above $23), as that would correspond to a breakout above the hourly downtrend line, after coming into support of the 20-day EMA.
Today, traders will be digesting the employment reports that will be announced before the open. The reaction to the unemployment number is likely to be a market mover, so be prepared for high volatility today. Remember, the broad market hasn’t really done much since the first hour of trading on the first day of the new year. Therefore, a negative, unexpected surprise in jobs data has the potential to cause stocks to pull back sharply. “Long” is definitely the right side of the market to be on, but recent price and volume patterns have not been convincing enough to get complacent.
Open ETF positions:
Long – XLE, SMH
Short (including inversely correlated “short ETFs”) – (none)
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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