Fighting off morning losses to close slightly higher, the stock market once again demonstrated its incredible resiliency we’ve become accustomed to in recent weeks. After opening near the flat line, stocks trended lower throughout the first ninety minutes of trading, but the bulls reclaimed the upper hand. The major indices grinded their way back into positive territory, though trading remained quiet. The S&P 500 gained 0.3%, the Dow Jones Industrial Average 0.2%, and the Nasdaq Composite 0.1%. Both the small-cap Russell 2000 and S&P Midcap 400 indices advanced 0.5%. As is frequently the case during bull markets, all the main stock market indexes finished near their intraday highs.
Turnover remained soft, as volume was little changed from the previous day’s levels. Total volume in the NYSE was 2% higher, while volume in the Nasdaq eased 3%. Trading in both exchanges was below 50-day average levels. Considering the modest gains of the major indices, market internals were pretty good. In both the NYSE and Nasdaq, advancing volume exceeded declining volume by a ratio of just under 2 to 1.
Yesterday, we began analyzing charts of ETFs with relative strength that we’re stalking for possible buy entry on a pullback. Today, we resume our analysis of potential trade setups, taking a look at a few strong ETFs not correlated to the technology sectors.
Biotech stocks have rocketed higher over the past several days, causing technical breakouts in ETFs such as the Biotech HOLDR (BBH) and iShares Nasdaq Biotech (IBB). Not too long ago, the biotechs were rather stagnant, but that has definitely changed! The daily chart of IBB is shown below:
Because the gains of the past three days have been so explosive, it’s unlikely IBB will retrace all the way down to support of its breakout above the June 2009 high (the red, dotted horizontal line). Frankly, such a retracement would probably be too steep to be healthy. However, a pullback to the area of the February 2009 highs (the blue, dashed horizontal line), around $75, could present a low-risk pullback entry point. If using Fibonacci analysis to predict the extent of a pullback, one will notice the 38.2% Fibonacci retracement is near the $75 level as well (from this month’s low to yesterday’s high). Finally, the 10-day moving average (the dotted purple line), a reliable indicator of short-term support in strongly trending ETFs, is rapidly rising higher. In just a few days, the price of the 10-day MA will converge around the $75 area as well. But even if IBB is so strong that it doesn’t pullback from here, we will look for the development of a short-term consolidation, or a possible “bull flag” pattern. With such newfound, bullish momentum in biotechs, IBB joins SMH (Semiconductor HOLDR) on our buy watchlist.
On the international front, it may soon be time to re-enter iPath India Index (INP), which we recently bought on a pullback to its 50-day MA, then subsequently sold into strength, for a large gain, as it tested resistance of its 52-week high. Since our exit about one week ago, INP has merely traded sideways, in a tight range, right at pivotal resistance of its 52-week high. If it breaks out above that level in the coming days, we like it for buy re-entry. Even though we would be buying at a slightly higher price than our original exit, we have not had the risk of holding INP through what could have been another correction. For us, it made sense to sell into strength, locking in the profit, then let INP prove it’s worthy of making another leg higher:
Unlike SPDR Gold Trust (GLD), which follows the price of the spot gold commodity contracts, Market Vectors Gold Miners (GDX) is comprised of a basket of individual gold mining stocks. On July 20, GDX broke its intermediate-term downtrend by gapping above resistance of its “swing high” and 50-day moving average. Since then, GDX has been consolidating in a very narrow, sideways range, right above support of its 50-day MA. In the near-term, we’re anticipating a breakout above this range, which could spark enough momentum to send GDX to test its 52-week high:
Because we’re already positioned in Gold Double Long (DGP), we will probably not “officially” buy a breakout in GDX. Exposure of just one precious metals ETF is enough for us. However, if you’re not already in GLD or DGP, or if you want to take advantage of the pattern in gold, without actually trading a commodity ETF, GDX may be of interest if/when it breaks out.
The S&P 500 is now less than 2% away from the 1,000 level. On a purely technical level, this is irrelevant, as there is little in the way of price resistance at the 1,000 level. Nevertheless, the index may encounter “psychological” resistance because of 1,000 being a large, round number that the general public thinks has some kind of important meaning. Remember how the popular financial media threw a party when the Dow first made it above the 10,000 level? Technically, it meant nothing, but it became an important level as a self-fulfilling prophecy. So, that being said, be on the lookout for possible selling into strength as the S&P nears the 1,000 level.
NOTE: In the first paragraph of yesterday’s commentary, there was a typo; “the evening of June 23” should have read “the evening of July 23.”
Open ETF positions:
Long – DGP, FXY
Short – (none)
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.
