Will the US Oil Fund (USO) break out this time? – The Wagner Daily 
October 19, 2010
Closing above their recent highs, stocks scored another round of broad-based gains yesterday, but light turnover showed a lack of institutional buying interest. Both the S&P 500 Index and Dow Jones Industrial Average gained 0.7%, while the Nasdaq Composite rose 0.5%. The small-cap Russell 2000 and S&P MidCap 400 indices advanced 1.0% and 0.6% respectively. All the main stock market indexes closed near their intraday highs, but a negative reaction to key earnings reports from Apple and IBM sparked a sharp selloff in the after-hours futures markets.
Total volume in the NYSE receded 30% below the previous day’s level, while volume in the Nasdaq similarly ticked 26% lower. In both exchanges, turnover slipped back below 50-day average levels. Notably, market internals were mixed. In the NYSE, advancing volume exceeded declining volume by a margin of nearly 3 to 1. However, the adv/dec volume ratio in the Nasdaq was fractionally negative, despite the higher closing price. This tells us the buying in the Nasdaq was not very broad-based.
Yesterday, the US Oil Fund (USO) showed clear relative strength to the broad market by rallying 2.3%. If that bullish momentum persists into today’s session, USO should finally break out above the high of its recent consolidation and key horizontal price resistance. The daily chart is shown below:
On October 15, USO sold off to “undercut” lower channel support of its multi-week trading range. This was bullish, as it had the effect of shaking out the “weak hands,” thereby absorbing overhead supply and enabling USO to more easily move higher. As such, there is a good chance USO will break out above the resistance levels shown on the chart above, enabling it to enter into a new uptrend. Since our October 13 buy entry, USO has merely been hanging out near our entry point, but we believe our patience will soon pay off. In addition to USO, the Retail HOLDR (RTH), discussed in yesterday’s commentary, should also be monitored for potential breakout in today’s session.
In the October 18 issue of The Wagner Daily, we pointed out the curious divergence between technology and financial stocks in last Friday’s session. We also said that such divergence frequently appears ahead of significant market corrections. Yesterday, we saw the exact opposite reaction, in which the financial sector showed major relative strength to the broad market, while tech stocks hung low. The sudden shift from one day to another tells us we are dealing with a market that is apparently becoming increasingly indecisive. In and of itself, this does not mean traders should suddenly abandon the long side of the market. However, a healthy degree of overall caution and alertness with one’s trading operations should be considered right now.
After the close of yesterday’s trading, tech giant Apple, Inc. (AAPL) trumpeted its latest quarterly earnings report. Although the company exceeded earnings estimates, sales of their popular iPad devices fell short of expectations. This sent the stock about 6% (20 points) lower in after-hours trading, obviously dragging down the Nasdaq futures along with it. Going into today’s session, traders will be focused on whether or not institutions step in to buy AAPL into weakness. If they don’t, we could see a negative reaction spread to the broad market as well. If that occurs, we would actually welcome a substantial correction in the broad market, as it would create new buying opportunities in strongly trending ETFs that pull back to support. If you have not already done so, this is a good time to consider raising your protective stops on winning long positions, so that a nice profit can be secured in the event of a sudden reversal.
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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