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Deron Wagner is the founder and portfolio manager of Morpheus Trading Group. His daily focus is managing and trading the Morpheus Capital Hedge Fund, which he founded in April of 2004. He also teaches his swing trading strategy with The Wagner Daily newsletter, which provides exact entry, exit,... More
My company:
Morpheus Trading Group
My blog:
Morpheus Trading Group - swing trading blog
My book:
Advanced Technical Analysis of ETFs
  • How Relative Strength In The Nasdaq Can Increase Your Trading Profits Now 0 comments
    Apr 29, 2013 11:47 AM | about stocks: QQQ, SMH

    Until recently, the 2013 stock market rally has clearly been led by the Dow Jones Industrial Average, while the Nasdaq Composite has lagged behind considerably.

    But since the recovery off the April 18 "swing lows" in the broad market, the Nasdaq has climbed 3.6%, while the Dow has gained only 1.2% during the same period.

    Is this sudden display of relative strength in the Nasdaq only a short-term aberration, or is it the start of new leadership in the stock market?

    It's too early to know for sure. However, if funds have indeed begun rotating into the Nasdaq, it would be a bullish signal for the overall market.

    This type of sector rotation would point to an increasing appetite for risk among banks, mutual funds, hedge funds, and other market-moving institutional players. This is because the tech-heavy Nasdaq is generally considered to be more "risky" then deploying funds in the "old school" Dow. Of course, the potential rewards for investing and trading in the Nasdaq are typically much greater than the Dow as well.

    Because our momentum-based strategy for swing trading stocks focuses primarily on small to midcap stocks (many of which are traded on the Nasdaq), we would obviously welcome the next phase of the market rally being driven by the Nasdaq.

    Many leading stocks in our swing trading portfolio, such as LinkedIn ($LNKD), have begun rallying to new 52-week or all-time highs ahead of the Nasdaq. This is a bullish indication of relative strength in the stock market that enables astute traders to outperform the main stock market indexes through trading in these market leaders.

    It's not only stocks that benefit from a strengthening Nasdaq. The right industry sector ETFs can show leadership and relative strength too.

    Market Vectors Semiconductor ETF ($SMH), which is currently showing an unrealized gain of 3.8% since buy entry in our nightly ETF and stock picking report, nicely fits the bill.

    Last week, the PowerShares Nasdaq 100 ETF ($QQQ) scored a solid 2.2% gain. However, $SMH jumped 3.9% last week (nearly double the advance of $QQQ). More importantly, $SMH broke out above a 3-month base of consolidation and rallied to a fresh 52-week high last week. It's a clear sign of relative strength in the semiconductor sector that $SMH has jumped to a new high ahead of the Nasdaq, which tells us we are holding on to the right positions.

    The April 24 breakout to a new 52-week high in $SMH is shown on the daily chart below:

    (click to enlarge)

    In case you missed it, we initially made a bullish call on $SMH (and the semiconductor sector) in this blog post about a month ago.

    At that time, we liked that $SMH was breaking out above resistance of a nine-year downtrend line, which was only apparent by looking at the long-term monthly chart interval of the ETF.

    Below is the same monthly chart of $SMH we pointed out on March 28, back when $SMH was still in consolidation mode (trading below its 52-week high):

    (click to enlarge)

    Now that $SMH has finally broken out to a new 52-week high, the breakout above the nine-year downtrend line shown above is becoming confirmed.

    Because this trend reversal is of such a long-term nature, it may provide swing traders with many stock and ETF buying opportunities in the semiconductor sector; not only in the near-term, but in the intermediate-term as well.

    In case you are new to momentum swing trading, it's important to understand that stocks and ETFs breaking out to new 52-week high usually provide us with our largest gains because these equities have a complete lack of overhead price resistance (which would otherwise be created by sellers who bought a higher price).

    If you are new to our overall swing trading system, including the concept of buying stocks and ETFs at new highs, click here for a basic overview of how our selection process works. But to quickly learn the key details of how our disciplined, rule-based trading methodology works, check out our complete online swing trading course today.

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    DISCLAIMER: There is a risk for substantial losses trading securities and commodities. This material is for information purposes only and should not be construed as an offer or solicitation of an offer to buy or sell any securities. Morpheus Trading, LLC (hereinafter "The Company") is not a licensed broker, broker-dealer, market maker, investment banker, investment advisor, analyst or underwriter. This discussion contains forward-looking statements that involve risks and uncertainties. A stock's actual results could differ materially from descriptions given. The companies discussed in this report have not approved any statements made by The Company. Please consult a broker or financial planner before purchasing or selling any securities discussed in The Wagner Daily (hereinafter "The Newsletter"). The Company has not been compensated by any of the companies listed herein, or by their affiliates, agents, officers or employees for the preparation and distribution of any materials in The Newsletter. The Company and/or its affiliates, officers, directors and employees may or may not buy, sell or have positions in the securities discussed in The Newsletter and may profit in the event the shares of the companies discussed in The Newsletter rise or fall in value. Past performance never guarantees future results.

    © 2002-2013 Morpheus Trading, LLC
    Reproduction without permission is strictly prohibited.

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