September 30, 2010
Stocks oscillated in a choppy, directionless fashion throughout yesterday's session before finishing modestly lower. To Nasdaq Composite slipped 0.1%, the Dow Jones Industrial Average 0.2%, and the S&P 500 Index 0.3%. The small-cap Russell 2000 managed to finish in positive territory, gaining 0.3%. The S&P MidCap 400 was unchanged. All the main stock market indexes closed near the middle of their intraday ranges. It was also an "inside day," meaning yesterday's highs and lows of the major indices were contained within their respective ranges of the previous day.
In both the NYSE and Nasdaq, total volume was 1% lighter than the previous day's level. The slightly lower volume was positive, as higher volume during a consolidation day could have been indicative of bearish "churning." Since the main stock market indexes began the consolidation patterns near their recent highs, the price to volume relationship of the broad market has been bullish overall.
Alternative energy is one industry that has suddenly started showing a lot of relative strength, indicating that institutions have begun rotating funds into the sector. Yesterday, PowerShares Clean Energy (NYSEARCA:PBW) broke out above key resistance of its prior highs from July, as well as its 200 day moving average. Perhaps most importantly, volume spiked to more than 300% its average daily level. This is shown on the daily chart of PBW below:
The best thing about yesterday's breakout was the strong volume that accompanied the advance. This tells us accumulation was taking place amongst mutual funds, hedge funds, and other institutions. Furthermore, the weekly chart looks pretty good as well, which confirms the relative strength exhibited on the daily chart. Below, notice that PBW has recently reversed its dominant trend by breaking out above an 8-month downtrend line:
Based on the combination of a breakout above horizontal price resistance, relative strength, strong volume, and the recent reversal of the dominant downtrend, we like PBW for long entry on any slight pullback. Ideally, a quick retracement to near yesterday's low, which correlates with the breakout level, would provide a lower-risk entry point than buying near the current price. If we enter PBW, we will promptly send an Intraday Trade Alert to regular subscribers.
In the September 28 issue of The Wagner Daily, we said, "In the near-term, one of the best senarios for SPY (the S&P 500 SPDR) would be a tight, light volume consolidation pattern for the next several weeks, holding above that key level of support (the breakout level above the August high). This would have the benefit of allowing the broad market to absorb its recent gains, while building a base of support from which to potentially launch another leg higher." So far, a lateral price consolidation is indeed what we are seeing. As such, current broad market price action remains healthy, and will likely continue to be, just as long as the S&P 500 holds above the 1,130 breakout level. On the upside, 1,150 is the magic number to watch, as it marks the high of the recent range.
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: email@example.com.
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