Morpheus Tradin...'s  Instablog

Stocks closed higher for the fifth consecutive day on Friday. Friday's performance was broad based and impressive although the pre-holiday trade was light. The market sold off slightly at the open but quickly recovered and rallied for the remainder of the session. All five major indices realized gains of over 1.0%. The S&P MidCap 400 led the march as it tacked on 1.7% on the day. The Nasdaq and the small-cap Russell 2000 both improved by 1.5% while the Dow Jones Industrial Average and the S&P 500 both gained 1.4%. Overall it was an impressive showing on Wall Street.

Despite the impressive price action, market internals ended the session mixed. Volume was down across the board. Turnover on the Nasdaq and the NYSE fell by 10.0% and 11.0% respectively. However, advancing volume overwhelmed declining volume across both exchanges. By the close the spread ratio finished at 10.5 to 1 on the Big Board and 7.2 to 1 on the Nasdaq. Due to the light volume we would not consider Friday to be an accumulation day for the market.

Due to market action we decided to lock in gains by covering our short position in COW and selling our position in EWM. We felt it was a prudent move given the recent run up in the market.

The iShares MSCI Hong Kong Index ETF (EWH) has spent the last six sessions climbing its way back through former support levels. EWH is now trading just below resistance of its 200-day MA, 50-day MA and former uptrend line. Although we view EWH as a potential short candidate, it is important to wait for confirmation prior to entering any trade. Over the next several days we will be looking for the formation of a reversal candle as possible confirmation that the rally may be weakening. Generally reversal candles occur just above or below key resistance marks. Just because a reversal candle forms does not mean that we would automatically take a short position. Rather, we would then look for the setup to develop further to confirm a reversal may be underway. For example, this may include several days of consolidation in the range of the reversal candle followed by a break below the reversal candle low.

Following a two day rally, on June 30th the CurrencyShares Australian Dollar ETF (FXA) formed a doji star suggesting indecision among bears and bulls. On Friday this ETF gapped down but quickly found support as it rallied to close near session highs. A move back above the two day high of $107.91 may present a buying opportunity in FXA. Ideally we would like to see several days of consolidation near this mark prior to FXA making a move higher.

The market has made an impressive move over the past five sessions and may need some time to "digest" the magnitude of the bullish price action. Regardless, our momentum indicators continue to suggest an overbought state in the market. As such, we are inclined to be patient and wait for new setups to develop rather than chase the market or blindly jump into short positions.