Stocks got off to a strong start with the major averages gapping up 1% or more across the board on the open. Unfortunately for the bulls, the open proved to be the highlight of the session, as stocks rolled over through the morning and once again in the early afternoon. The averages did find some traction and bounced off the lows of the day around the 2:30 pm reversal period, but a slight selloff into the close pushed the averages back into the lower third of the day's range. The S&P 500 held on to a 0.5% gain, while the Nasdaq Composite and Down Jones Industrial Average were both up 0.3%. The S&P Mid-Cap 400 logged a 0.2% gain. The Small-Cap Russell 2000 undercut the prior day's low and just barely held on to a positive close at 0.1%.
One positive we can take from yesterday's selling action is that the major averages did avoid a bearish distribution day. NYSE volume fell 2% short, while Nasdaq volume sank 16% off the prior day's pace. The lighter volume selloff reveals that institutions were not actively selling stocks into strength. This was also confirmed by the market internals, which closed in positive territory, with advancing volume beating declining volume by roughly 2 to 1 on both exchanges.
The iShares Xinhua China 25 Index (NYSEARCA:FXI) has been consolidating in a tight range over the past few weeks just below the 200-day moving average. A breakout above the 200-day moving average and the September high (just above 41.15) could provide an early entry that leads to a weekly downtrend line break:
We call the breakout above 41.00 an "early entry" because we are buying in anticipation of a downtrend line breakout. The early entry allows us to get in slightly ahead of the crowd, before the obvious buy point. One could establish a half position at the early entry point and add on the downtrend line break above 42.00.
The banking index has shown quite a bit of relative weakness as of late by setting a lower low in late August while the major averages set a higher low. The rally in SPDR KBW Bank ETF (NYSEARCA:KBE) has run into resistance of the 50-day moving average and the downtrend line. While we do not expect the banking sector to lead the market higher anytime soon, we'd like to see these stocks at the very least hold current levels and attempt to print a higher low. If KBE fails to push through the 50-day MA and sells off, then we'd like to see support hold up around 22.00.
We continue to see our long position in the PowerShares DB Agriculture Fund (NYSEARCA:DBA) work its way higher. Since the June bottom, DBA's pattern is a great example of a stock showing relative strength. If we compare the highs and lows in DBA vs the S&P 500 from the June low, we clearly see how DBA has not made one lower low since bottoming out (detailed on the chart below). As the market attempts to put in a low, these patterns are usually the most reliable for swing trades on the long side.
Open ETF positions: |
Long - DBA, TUR, UUP
Short (including inversely correlated "short ETFs") - SSG, EPV
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 DBA, Long TUR, Long UUP, Short SSG, Short EPV