Stocks closed out a volatile week of trading on a positive note, as strength in the tech arena enabled the Nasdaq Composite to jump 1.5% last Friday. Less enthusiasm was seen in the S&P 500 and Dow Jones Industrial Average, which gained 0.6% and 0.2% respectively. The small-cap Russell 2000 rose 1.0%, as the S&P Midcap 400 advanced 0.5%. With the exception of the Dow, which showed relative weakness, the major indices closed near their intraday highs. The Dow closed near the middle of the day’s range.
As we typically see on quadruple witching options expiration days, volume surged higher across the board. Total volume in the increased 58%, while volume in the Nasdaq was 49% greater than the previous day’s level. In addition to quadruple witching, turnover was artificially inflated by the rebalancing of the S&P indexes after Friday’s close. Given the effects of these two events, it would be inaccurate to declare last Friday a bullish “accumulation day” of institutional buying.
One sector that may provide a tradeable, upside pop within the next week is energy. Several ETFs in the sector have formed “double bottom” or “undercuts” of their prior lows, and are now setting up to break out above multi-month downtrend lines. This is illustrated on the daily chart of S&P Energy SPDR (XLE) below:
Though one could make a partial trade entry above the high of the past two-days with relatively low risk, it may be better to wait for a confirmed breakout above last week’s high of $57.25. Waiting for such an entry forces XLE to confirm the breakout by rallying back above its 50-day moving average (the teal line). Since the multi-month downtrend line converges with the 50-day MA, a buy entry above that price makes the play even better. The Oil Service HOLDR (OIH), another energy-related ETF, has also formed a pattern that may be good for a short-term swing trade on the long side:
Another sector to monitor in the coming week is retail. Last Friday, the S&P Retail SPDR (XRT) sold off sharply in the morning, slicing through its 20 and 50-day moving averages, as well as new support of its prior two-month downtrend line. However, the ETF formed a bullish candlestick by recovering to close near its intraday high, which was only slightly below the previous day’s close. Since this “undercut” formation had the effect of washing out the “weak hands” (investors or traders who sell at the first sign of a pullback), there is now less overhead supply for XRT to contend with. Therefore, iIf XRT gets above last Friday’s high and holds, it has the potential to rally back to test its October 2009 high. The setup is illustrated on the chart of XRT below:
Despite last Friday’s gains, the quadruple witching and major rebalancing of the S&P indexes means it would be pointless to make any conclusions on the current state of the major indices right now. Rather, we’ll wait until the passing of today’s session to re-assess the strength or weakness of the broad market’s price action and trend. Now that two full days have passed since last Wednesday’s Fed announcement on interest rates and economic policy, we should start seeing the stock market’s real, not knee-jerk, reaction to the announcement. Because this is a holiday-shortened trading week, be prepared for light volume levels that can cause choppier than usual price action.
Open ETF positions:
Long – SMH
Short (including inversely correlated “short ETFs”) – FAZ, 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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