Failing to reclaim any losses from the previous day’s slide, stocks meandered in a very tight, sideways range throughout the entire day before finishing slightly lower. As is commonly the case following a large, one-day sell-off in the market, the main stock market indexes merely consolidated near the bottom of the previous day’s range. The Nasdaq Composite edged 0.1% lower, as both the S&P 500 and Dow Jones Industrial Average lost 0.3%. The small-cap Russell 2000 and S&P Midcap 400 indices fell 0.4% and 0.5% respectively. All the major indices closed near the bottom third of their intraday ranges, which didn’t mean much considering yesterday’s ranges were extremely narrow.
Volume eased in both exchanges, as the bears paused to catch their breath from the recent selling. Total volume in the NYSE declined 16%, while volume in the Nasdaq was 29% lighter than the previous day’s level. Turnover in the NYSE remained above its 50-day average level, despite the slower trade. As we approach the three-day, holiday weekend, volume will probably continue to recede. Increased choppiness and volatility often accompanies periods of declining volume, so be careful not to churn your account over the next two days.
While many sectors oscillated in a sideways range yesterday, gold and silver ETFs zoomed higher. SPDR Gold Trust (GLD) ramped up 2.4%, while iShares Silver Trust (SLV) jumped 3.1%. In the August 31 issue of The Wagner Daily, GLD was poised to soon break out above the upper channel of a “pennant” formation on its weekly chart. One day later, we illustrated how SLV was similarly positioned to bust through resistance of a downtrend line that has been in place for the past one and a half years. These key technical breakouts came with yesterday’s rally, as higher volume confirmed the moves. The pivotal breakouts are shown on the long-term, weekly charts of GLD and SLV below:
Although not shown on the weekly charts above, yesterday’s volume in GLD surged to 300% its average daily level. Turnover in SLV was more than double the average. The volume spikes served to confirm yesterday’s breakouts, as they pointed to accumulation among mutual funds, hedge funds, and other institutions. With GLD breaking out of a “pennant” formation that began more than six months ago, there’s now a strong possibility bullish momentum from yesterday’s breakout will enable gold to quickly cruise to a new high (over 1,066 for spot gold futures, 100.44 for GLD). But if GLD is unable to break out this time around, we’ll be looking at a “triple top” on the weekly chart, right around the $100 level. As for silver, SLV has more ground to cover than GLD before coming into resistance of its all-time high, set in March of 2008. Nevertheless, yesterday’s clean breakout should still enable SLV to tag along for the ride. In the coming days, we’ll be paying close attention to the relative performances of GLD versus SLV. Specifically, we want to determine whether GLD will continue to show relative strength to SLV, or if SLV starts to play “catch up.”
While spot gold and silver turned in strong performances yesterday, gold mining stocks fared even better. Market Vectors Gold Miners (GDX), comprised of a basket of individual gold mining stocks, rocketed 9.5% higher yesterday. As with GLD, volume in GDX spiked to more than three times its average daily level. Unfortunately, the actual long-term chart pattern of GDX is less clear than that of GLD or SLV, but yesterday’s breakout could provide momentum traders with a short-term buying opportunity if GDX pulls back to support of its recent breakout. The daily chart of GDX is shown below:
Given that the major indices have failed their August 21 breakout levels, and have fallen below their 20-day exponential moving averages (EMAs) again, it seems pretty likely the main stock market indexes will soon test support of their “swing lows” from August 17. More significant support from the rising 50-day moving averages of the major indices is just below those August 17 lows. This is shown on the daily chart of the S&P 500 below:
Though stocks could easily bounce within the next day or two, considerable overhead supply has been left behind in the wake of this week’s sell-off. Prior support of the 20-day EMAs will now act as resistance, and could prove to be more difficult to overcome this time around. Overall, the short-term market trend appears to favor the bears. However, the intermediate-term trends still remain cautiously bullish. Only a confirmed break of the August 17 lows would negatively change the intermediate-term bias.
Open ETF positions:
Long – DGP, VXX, IBB
Short – FXI, TWM, SRS (both TWM and SRS are inversely correlated “short” ETFs)
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 (morpheustrading.com), 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.
For a free trial to the full version of The Wagner Daily above, which includes detailed ETF trade setups and daily position updates, or to learn about our other newsletters, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com.
