After gapping lower on the open, the major indices reversed to the flat line within the first thirty minutes of trading. However, stocks failed to gain traction thereafter, and the broad market merely oscillated in a sideways range throughout the rest of the day. Aided by relative strength in the tech arena, the Nasdaq Composite managed to rise 0.4%, but the S&P 500 and Dow Jones Industrial Average were both unchanged. Small-caps also outperformed, enabling the Russell 2000 to rally 0.9%. The S&P Midcap 400 bounced 0.2%. Although the market's gains were not broad-based, the major indices halted their four-day losing streak. All the main stock market indexes closed near the upper quarter of their intraday ranges.
Total volume in the NYSE was 9% lighter than the previous day's level, but turnover in the Nasdaq ticked 1% higher. Turnover in both exchanges remained well below 50-day average levels. Furthermore, volume in the NYSE was the lightest volume day of the year. Lethargic trade is common this time of year, as traders and investors enjoy their Summer vacations. Volume is likely to remain lighter than average until at least after the Labor Day holiday. In the NYSE, advancing volume was on par with declining volume. The adv/dec volume ratio in the Nasdaq was positive by 3 to 2.
Many industry sectors have been moving in sync with the major indices in recent weeks, but the Semiconductor Index ($SOX) has been showing major relative weakness. The S&P 500 Index has only retraced approximately 50% of its range from the July low to August high, but the $SOX has already fallen all the way below its July 2010 low, and is nearing its February 2010 low. Therefore, if the broad market is unable to stage a meaningful bounce in the coming days, the semiconductor ETFs may break down below major levels of support, creating potential short sale entry points. The ProShares UltraShort Semiconductor (NYSEARCA:SSG) is an inversely correlated "short ETF" that is setting up for buy entry, and will trigger if weakness continues in the $SOX. The weekly chart of SSG is shown below:
In yesterday' morning's commentary, we said, "TLT finished the (last) week at a fresh, 52-week closing high, and is now poised to make another leg higher in the near to intermediate-term." As anticipated, TLT rocketed higher when the market opened several hours later. Finishing the day 2.5% higher (a huge one-day move for a fixed-income ETF), TLT is now showing an unrealized gain of more than 7 points (including two monthly dividend distributions) since our June 22 entry. Yesterday's surge is a great example of how stocks and ETFs at new 52-week highs continue higher because of the lack of overhead supply. Now that TLT is trading at a fresh high, let's take a look at the longer-term weekly chart, using Fibonacci retracement lines, in order to determine where the ETF may encounter its next significant resistance level:
As shown on the chart above, TLT will bump into resistance of its 50% Fibonacci retracement level just above yesterday's high. However, given that TLT just broke out yesterday, it's more likely it will rally nearer to the 61.8% Fibonacci level before running into substantial selling pressure. For now, we're planning on selling TLT into strength, locking in a nice gain, at the $108 to $109 area. In the meantime, we'll be continually trailing our protective stop higher, in order to lock in gains and protect profits in the event of a reversal.
Open ETF positions: |
Long - TLT, DBA, UUP
Short (including inversely correlated "short ETFs") - DZZ
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 firstname.lastname@example.org.
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Disclosure: Long TLT, Long DBA, Long UUP, Short DZZ