Opening higher on the back of positive earnings from Apple (AAPL), stocks got off to an encouraging start yesterday morning, but traders immediately sold into strength of the gap, causing the major indices to quickly erase their early gains. Thereafter, the main stock market indexes oscillated in a sideways range for several hours, until plunging lower in the late afternoon. Negative comments by Fed chief Ben Bernanke, in which he said the economy looks “unusually uncertain,” was apparently the impetus for the late-day slide. The Dow Jones Industrial Average lost 1.1%, the S&P 500 1.3%, and the Nasdaq Composite 1.6%. The small-cap Russell 2000 and S&P Midcap 400 indices fell 1.8% and 1.5% respectively. Opposite of the previous day’s action, the major indices closed near their lows of the day.
Although the S&P and Nasdaq scored a bullish “accumulation day” by gaining on higher volume Tuesday, the indices suffered a bearish “distribution day” by registering a round of even higher volume losses yesterday. Total volume in the NYSE increased 7% above the previous day’s level, while volume in the Nasdaq ticked 14% higher. Nevertheless, in each of the past two days, turnover was below 50-day average levels, indicating a lack of substantial institutional participation both days. In the NYSE, declining volume exceeded advancing volume by a margin of nearly 5 to 1, the same ratio in which advancing volume beat declining volume the previous day. The Nasdaq adv/dec volume ratio was roughly the same.
Yesterday, fixed-income (bond) ETFs were among the top performers, as many broke out to fresh 52-week highs. One such instance was iShares 20+ Year Treasury Bond (TLT), which broke out to close at its highest level since April of 2009. We frequently discuss how the “undercut” of an obvious level of support is an ideal, low-risk entry point to buy ETFs, and last week’s price action in TLT was a good example of this. On the daily chart below, notice how TLT “undercut” its 20-day exponential moving average (the beige line), snapped right back the following day, then rallied to a new closing high only a few sessions later:
As of today, our model ETF portfolio has been long TLT for one month. Presently, the trade is showing an unrealized gain of just over 4 points (including a monthly dividend distribution). In the “Daily Performance Report” section below, regular subscribers should not our updated stop in TLT, which removes risk from the trade in the event of another move back down.
In yesterday’s commentary, we said the main stock market indexes were in “no man’s land,” just above the mid-point of their recent ranges from the June highs to July lows. We also said the major indices were again poised to test resistance of their 50-day moving averages, which they did on yesterday’s open, but were again unable to reclaim support of that pivotal indicator of intermediate-term trend. On the daily chart of the Nasdaq Composite, notice how the 50-day moving average has acted as a definitive “line in the sand” on four separate occasions since May of this year:
In the very near-term, yesterday’s intraday highs of the major indices are pivotal levels of resistance. If stocks get above yesterday’s highs, preferably on higher volume, it would cause most of the main stock market indexes to reclaim their 50-day moving averages, perhaps improving near-term bias of the overall market. But for now, indecision remains the dominant theme. Over the past four days, the price to volume relationship of the S&P and Nasdaq has included two days of higher volume losses, but also one bullish reversal day of higher volume gains. Clearly, we’re in the midst of a rather confused market. Laying low, avoiding new trade entries, is the best way to manage the situation until a bit of follow-through comes back into the market.
| Open ETF positions:
Long – TLT, DBA, UNG, SMH |
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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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