Broad based averages slid lower during the first fifteen minutes of trading yesterday to undercut the prior session’s low. The opening weakness created a little shakeout action, as stocks reversed higher after 10 am and pushed to new intraday highs by late morning. Stocks drifted lower through lunch, but recovered nicely during the final ninety minutes of trading and ran to new intraday highs in to the close. The Nasdaq Composite and Dow closed up 0.5%, while the S&P 500 gained 0.4%. Small and mid-cap stocks lagged, as the Russell 2000 and S&P mid-cap 400 both gained 0.1%. The Nasdaq 100 clearly outperformed, closing 1% higher.
Though yesterday’s close was bullish, the light volume on both exchanges failed to confirm the price action. Volume sank 9% on the NYSE and 3% on the Nasdaq. Market internals also failed to confirm, as advancing volume equalled declining volume on the NYSE and registered a 1.7 to 1 reading on the Nasdaq. So we have a bit of a divergence between the price action and the internals, which suggests some caution here. However, broad based indices are bouncing off support of the range lows, so odds favor an upward bias over the next few days.
Over the past two days we have seen relative strength in the Nasdaq Composite, especially in Nasdaq 100 ETF (QQQQ), as evidenced by the 15-minute chart below (the red lines represent the opening 15-minute range high):
The relative strength is easy to spot when using the opening 15-minute range high as a reference point. Traders should focus on Nasdaq stocks to take advantage of the strength if the market is to push higher from here.
Since the Nasdaq is showing relative strength, it then makes sense to locate the strongest sector within the Nasdaq, which has been the Semiconductor Index. The chart below details yesterday’s Intraday Buy Alert into the Semiconductor HOLDR (SMH):
In Tuesday’s report we discussed the possibility of SMH not pulling back to our trigger price, so when the price action gapped down yesterday on the open and held, we monitored the action for a buy entry over the opening range high. Aside from SMH, the iShares Biotech (IBB) is also setting up nicely on the daily chart and is buyable over yesterday’s high (we are already long).
Though we suggest that traders focus on the strength is in the Nasdaq, the iShares Transportation (IYT) is still buyable over yesterday’s high.
In the short-term, i Shares Japan (EWJ) has shown great relative strength vs. the SPY. The hourly chart below compares the percent return over the past ten days:
Moving to the daily chart, we see that EWJ recently gapped above the downtrend line in early Decemeber. After stalling out on 12/4, the price action has settled in to a tight trading range over the past few days and is buyable over the three-day high.
Though EWJ is showing strength in the short-term, we look to the weekly relative strength chart below to compare the percent return of iShares Brazil (EWZ) vs. the SPY:
Intermediate-term trend followers looking to take advantage of long-term relative strength may establish a buy entry over the two-day high in EWZ. Though the false breakout action in early December appears to be ugly, these false breakouts tend to wash out all the weak longs. Once the price action firms up, the buyers should return to lift the price to new highs.
Open ETF positions:
Long – IBB, SMH
Short (including inversely correlated “short ETFs”) –
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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