Much like the previous day’s action, the major indices engaged in a lot of “huffing and puffing” throughout the day, but ultimately finished last Friday’s session near the flat line. Stocks rallied in the morning, reversed to new lows of the day a few hours later, then stabilized and drifted above their lows into the closing bell. Both the S&P 500 and Nasdaq Composite edged 0.1% higher. The Dow Jones Industrial Average, Russell 2000, and S&P Midcap 400 indices all slipped 0.1% lower. The main stock market indexes settled just above the bottom third of their intraday ranges. For the week, the broad-based indices scored a round of moderate gains; it was the broad market’s fourth consecutive weekly advance.
Turnover eased across the board. Total volume in the NYSE receded 11%, while volume in the Nasdaq was 13% lighter than the previous day’s level. Slower trade during sessions of consolidation is positive because it indicates traders are not selling into strength while the bulls take a rest. Nevertheless, the prior day’s session was marked by bearish “churning,” and there was also one “distribution day” last week. Market internals in both exchanges were fractionally positive, despite the mixed closing prices.
After lagging behind for a year, the financial sector finally began showing considerable relative strength over the past month. Upon detecting the new inflow of funds into the financial industry, we bought KBW Capital Markets SPDR (KCE) on March 4, when it broke out above resistance of a five-month downtrend line at the beginning of this month. After trending steadily higher, we subsequently sold into strength on March 17, exiting near its highest level of the month. At the time, we said we would monitor KCE for potential re-entry on a pullback. But rather than retracing substantially, KCE has consolidated in a sideways range, which is known as a “correction by time.” This has enabled the ascending 20-day exponential moving average to rise to meet the price of KCE, which has also come into support of its intermediate-term uptrend line off the February low. This is shown on the daily chart of KCE below:
Technically, KCE may already be buyable near last Friday’s closing price. However, with pullback entries, we usually prefer to wait for an “undercut” below the obvious level of support. In this case, that would be a probe below the 20-day EMA (the beige line) and/or the March 15 low of $36.94. Waiting for the “undercut” ensures a better reward/risk entry when buying on the way back up, as it has the effect of shaking out traders with tight stops, who are then forced to buy back in, thereby driving prices higher. Time and time again, we see the strongest rallies resulting from a pullback that “undercut” an obvious level of support. Obviously, the “undercut” doesn’t always happen, in which case it’s still a decent place to buy KCE, but we’ll monitor the price action over the next day or two first.
Speaking of “undercuts,” take a look at the daily chart of iShares Xinhua China 25 Index (FXI):
On March 25, FXI gapped down to close below its 50-day MA by a few cents, as well as “undercut” its March 4 low of $39.99 on an intraday basis (the low of the consolidation range). But notice the bullish price action the very next day. FXI immediately gapped up to close above the March 25 high. This action prompted us to buy an initial half position in FXI, which we’ve been monitoring for potential breakout above its four-month downtrend line. A rally above the March 26 high will correspond to a breakout above that downtrend line, and will also trigger our buy entry into the remaining shares of FXI. In the pre-market, FXI is presently poised to open about 1.5% higher. So far, the ETF appears to be showing relative strength and the necessary momentum to reverse its downtrend.
| Open ETF positions:
Long – UUP, FXI |
 |
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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