The Wagner Daily - October 25, 2010
Concise technical analysis and picks of the leading global ETFs
The major indices showed split results on Friday, as the higher beta indices rallied, while large caps lagged slightly. Regardless, trading on the day was unimpressive and volume dropped significantly. Further, the major indices remained in a narrow trading range during the session. The Nasdaq, S&P MidCap 400 and the small-cap Russell 2000; all rallied to close in the positive by 0.8% on Friday. The S&P 500 managed to eke out a 0.2% gain, while the Dow Jones Industrial Average shed 0.1% Sector performance was mixed on the day, and traded similar to the major indices. The Energy sector led the winners by posting a 0.7% gain. The Consumer Discretionary and Consumer Staples Sectors gained 0.6% and 0.4% respectively, while the Technology sector was up by 0.3%. Financials, Healthcare and Industrials were flat on the day, while the Materials Sector shed 0.7%. The recent consolidation suggests the market is "taking a rest", before resuming the uptrend. Nonetheless, we are keeping an open eye for clues of a market reversal.
Total volume on the day was markedly down. On the NYSE, volume plummeted 26.0% day over day. Nasdaq volume was equally anemic, as it dropped 22.0% on Friday. Advancing volume outpaced declining volume on the NYSE by an insignificant 1.4 to 1. On the Nasdaq, the advancing volume to declining volume ratio was 3 to 1. As with total volume, advancing to declining volume was unimpressive. Friday's internals clearly suggest a lack of participation by institutional players.
It is often useful to look at longer timeframes to analyze the broad market. Viewing things from a distance can help bring clarity when short term signals conflict, or if there are signs that the market may be reaching a point of exhaustion. Below, are monthly charts over a six year timeframe for the DJIA, S&P 500 and the Nasdaq. Notice that the Dow Jones Industrial Average and the S&P 500 are testing critical resistance levels, while the Nasdaq is well above its key moving averages. Clearly, there has been a lack of leadership by large cap stocks during the current uptrend. Further, it is not uncommon for trends to reverse, when there is a lack of participation by all components of the broader market. At the least, an analysis of a longer timeframe helps clarify, "the forest for the trees".
The Market Vectors Russia Trust (NYSEARCA:RSX) is poised for another breakout. After testing its 20-day exponential moving average on October 19th and 20th, this ETF rallied to the high end of the recent trading range on strong volume. A break above the two day high will trigger a buy signal for RSX. We are officially placing RSX on the Watchlist. Trade details can be found below.
The ETF Direxion Daily Semiconductor Bull 3X (NYSEARCA:SOXL), rallied over 5.0% on Friday. Further, it rallied on strong volume, on a day where broad market turnover dropped dramatically. SOXL has been consolidating along its 20-day exponential moving average since late September. A breakout above $33.50 on strong volume would make SOXL a potential buy entry. However, as with all leveraged ETFs, we caution that our holding period is generally shorter, due to the effects of daily "resets".
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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