November 1, 2010
In last Friday's action, the major indices ended the week by registering the tightest intraday trading range since October 22nd. It was also the thirteenth day of broad market consolidation. As a technical indicator, tight consolidation often leads to a breakout that resumes the dominant trend. Typically, the longer the consolidation, the more powerful the subsequent trend resolution. The Dow Jones Industrial Average, S&P 500 and Nasdaq Composite were all unchanged in last Friday's session. The small-cap Russell 2000 and S&P MidCap 400 both claimed modest 0.3% gains. Friday's trading was generally uneventful, as stocks were mixed and primarily flat. Overall, significant leadership was absent from the market for the entire week.
Like the prices of the major indices, turnover was virtually flat on the day. Nasdaq volume was up by 0.4%, while the NYSE saw a decline in volume of 0.4%. Although advancing volume outpaced declining volume on both the NYSE and the Nasdaq, the difference was slight. The up to down volume ratio was approximately 3 to 2 on the Nasdaq. The NYSE realized a slightly lower ratio. As has frequently been the case throughout the past two weeks, market internals were directionless. Institutional traders seem to be waiting for confirmation of the next big move before jumping back into the market.
In the October 29 issue of The Wagner Daily newsletter, we noted that, "The iShares Dow Jones US Telecom (IYZ), has been consolidating in a tight range along the 20-day MA. After a 'gap down' below the 20-day MA on October 19th, IYZ immediately rallied back into the trading range. This is a clear example of a 'shake out' day. A break above the 3-day high on higher than average volume provides a potential long entry point for IYZ." Based on last Friday's price and volume action that followed, we are now placing IYZ on the "official" watchlist for potential buy entry. For our members, detailed trigger, stop, and target prices can be found in the "Today's Watchlist" segment of this newsletter below.
After a powerful rally that began on August 27th and ended on October 15th, the iShares MSCI All Peru Capped Index (EPU) has consolidated in a 3-point trading range. At the same time, it has formed a pattern similar to a bullish "pennant" formation. Furthermore, since the September 25th gap up, EPU has consolidated in an even tighter 1-point range. A strong volume rally above the 4-day high of $47.02 presents a potential long entry signal for this ETF. We will send subscribers an Intraday Trade Alert if we decide to take a position in EPU.
Many ETFs are showing signs of being "over-extended," but this does not mean they won't continue rallying. Nevertheless, it is always nice to see healthy price consolidation along the way. This is sometimes referred to as a "discussion of value." Consolidation patterns builds bases from which to launch the next rallies. They also create "confidence" amongst bulls (if and when a breakout occurs). The same holds true in a downtrend. A good example of an ETF that has spent a great deal more time consolidating than most is iShares MSCI Malaysia Index Fund (EWM). Since September 1st, EWM has been moving sideways, along its 20-day EMA, thus establishing a relatively broad base of support during the most recent rally. On Friday, EWM popped above a 5-day consolidation zone on increasing volume. Further, EWM recently saw a high volume, "shakeout day" on strong volume. On the chart below, notice the recent "undercut" of the 20-day EMA, followed by a quick rebound back above this moving average. If volume continues to improve, EWM offers a potential long entry above the October 29 high:
With Election Day only 24 hours away, the market is likely to make a significant move out of its consolidation pattern this week. The consolidation at the highs favors another upside move, as the uptrend is still in place, but we're inclined to be cautious in the current environment.
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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