The bulls remained in control ahead of the Christmas weekend, as stocks logged their fifth consecutive day of gains last Thursday. The main stock market indexes also finished at new closing highs of 2009. The Nasdaq Composite gained 0.7%. The S&P 500, Dow Jones Industrial Average, small-cap Russell 2000, and S&P Midcap 400 indices all advanced 0.5%. Each of the major indices closed near its intraday high.
Because the trading session closed three hours early, volume was obviously much lighter than the previous day’s levels. Turnover in both the NYSE and Nasdaq declined 59%. But even after adjusting for the early closing time, both exchanges still would have been on pace for the lightest volume day of the year. With the week between Christmas and New Year’s Day typically being the slowest week of the year, trading is unfortunately likely to remain lethargic for at least the next four days.
In the December 23 issue of The Wagner Daily, we pointed out the pullback in SPDR Gold Trust (GLD), which was coming into support of its weekly uptrend line. In the two days that followed, GLD moved higher, and is now poised to reclaim its 50-day moving average. If it does, GLD could start making its way back to the prior high. A related ETF to keep on your radar screen is Market Vectors Gold Miners (GDX), which is bouncing off support of its weekly uptrending channel. Take a look:
Last week, the CBOE Volatility Index ($VIX), also known as the “fear indicator,” dropped below 20 for the first time since August of 2008:
Since markets typically correct when investors have the least amount of fear, a reading below the 20 level indicates a high level of complacency. Though we would never base our trading decisions solely on the level of the $VIX, it has been a reliable indicator for keeping the degree of a market’s trend in perspective. Obviously, there’s no assurance the $VIX won’t continue even lower in the near-term, but the current reading of 19.46 gives us sufficient reason to be very careful on the long side of the market.
After trading in a choppy, sideways range for six weeks, the S&P 500 finally broke out above the high of its recent consolidation last Thursday. This is shown on the daily chart of the S&P 500 below:
Curiously, the breakout above the range occurred on a shortened session that was the lightest volume day of 2009. While this certainly doesn’t mean the breakout was not legitimate, it nevertheless gives us substantial cause for suspicion. When breakouts above obvious resistance levels occur on extremely light volume, they often fail to hold up. Unfortunately, with trading expected to remain light for the next week, we probably won’t see the real intentions of mutual funds, hedge funds, and other institutions until after the new year.
Open ETF positions:
Long – SMH
Short (including inversely correlated “short ETFs”) – EEV, FAZ
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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