Following through on Wednesday’s strong closing action, the major averages gapped higher on the open and ran up about 1% before stalling around 10am. The opening strength failed to attract buyers, as stocks drifted sideways to lower the rest of the session. The Dow and S&P held on to the morning lows in the afternoon and closed up 0.7% and 0.6% respectively. The S&P Midcap 400 also gained 0.6%. The Nasdaq set new intraday lows in final hour of trading, but still closed up 0.3%. The Russell 2000 was hit the hardest in the afternoon, as it failed to hold the gap and closed in negative territory, down -0.4%.
Total volume was mixed and uninspiring. Nasdaq volume increased by 2%, while NYSE volume fell by 1%. Market internals failed to impress yet again with advancing volume equalling declining volume on the Nasdaq. NYSE advancing volume beat declining volume by a 1.7 to 1 margin. The market continues to chop on light volume and lazy internals, so traders should reduce share size and look to take profits quickly until market conditions improve.
The dollar continues to hold this market hostage:
If the PowerShares US Dollar (UUP) is able to hold the 50-day MA, then we’d expect the broad market averages to sell off and possibly test the lows of the current range. A deeper correction in UUP could send the broad market to new swing highs.
The Semiconductor HOLDR (SMH) failed to follow through yesterday, though we could see a tight-ranged bull flag pattern develop while the 10-day MA plays catch up. As usual, before this setup is ready to push higher we may see some sort of one or two bar undercut to wash out the tight stops.
Let’s take a look at a few charts that may offer a buy entry from a longer-term consolidation.
SPDR S&P Retail (XRT) is setting up for a potential downtrend line breakout above the 50-day moving average.
The iShares Turkey (TUR) has formed a bullish double bottom reversal and is buyable on a pullback to support around the $50.00 level, as long as the action holds above the 20-day EMA. Traders looking for an intermediate-term setup could establish partial size at support and add on a breakout above the recent swing high.
Energy stocks are potentially setting up for a double bottom reversal:
SPDR S&P Select Energy (XLE) has undercut the prior low, but we would need to see a sharp reversal to the upside before getting bullish on this pattern. There is the possibility of a slow drift up to the 50-day MA, which would present short sellers with a low-risk entry point.
Open ETF positions:
Long – Flat
Short (including inversely correlated “short ETFs”) – Flat
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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