October 14, 2010
Bagging their fourth straight day of gains, stocks cruised higher yesterday, enabling the major indices to close at their highest level since early May of 2010. The major indices opened higher, trended north throughout most of the day, then pulled back in the final 90 minutes of trading. The Nasdaq Composite jumped 1.0%, as the S&P 500 Index and Dow Jones Industrial Average registered identical gains of 0.7%. The Russell 2000 and S&P MidCap 400 advanced 1.5% and 0.9% respectively. Because of softness into the close, the main stock market indexes closed near the middle of their intraday ranges, which was only slightly above their opening prices.
Turnover surged across the board, as institutions supported yesterday's buying. Total volume in the NYSE ticked 26% higher, while volume in the Nasdaq similarly rose 18% above the previous day's level. This time, trading in both exchanges was well above 50-day average levels. Market internals were also solid. In both the NYSE and Nasdaq, advancing volume exceeded declining volume by a margin of approximately 3 to 1.
Most of the ETFs currently trading at new 52 week highs, or even all-time highs, are international ETFs, particularly those of emerging markets. Within the domestic stock markets, we are not seeing a lot of bullish divergence within specific industry sectors. But one exception is First Trust Dow Jones Internet Index Fund (NYSEARCA:FDN). The daily chart is shown below:
Last month, FDN broke out to a fresh all-time high, when it rallied above its April 2010 peak. For the past three weeks, FDN has been consolidating at its highs, in a tight, sideways range. Over the past week, the 20-day exponential moving average (the dotted beige line) has been perfectly acting as support. Now that the 20-day exponential moving average has caught up to meet the price of FDN, the ETF may be poised to break out above the high of its consolidation, and begin making another leg higher within its dominant uptrend. The high of the consolidation is $30.62, so a potential breakout buy entry would be about 10 cents above that level.
Thanks to yesterday's rally, all the main stock market indexes are now trading at their best levels since before the May 6 "flash crash." Considering the range-bound, apathetic price action of the summer months, that is certainly an accomplishment. However, the broad-based indices are now approaching major resistance of their April 2010 highs, which are also their 52-week highs. While the overall broad market trend has been bullish since the beginning of September, the ability or inability of the major indices to break out above their April highs will soon show us what this market is really made of.
A convincing rally above the April highs in the main stock market indexes would be quite positive, as it would cause stocks to establish new dominant uptrends. But until that happens, a healthy degree of caution should be exercised near current price levels, due to significant impending price resistance and overhead supply. While it certainly a good idea to continue taking advantage of the bullish trend, consider tightening stops on any winning long positions, in order to lock in nice profits when the inevitable pullback/shakeout eventually comes.
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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