October 28, 2010
Selling pressure in the first half of the day initially positioned the broad market to close substantially lower yesterday, but the resilient bulls showed up in the afternoon, enabling stocks to finish with mixed results. Strength in the tech arena enabled the Nasdaq Composite to edge 0.2% higher. However, the rest of the major indices declined moderately. The Dow Jones Industrial Average, off 1.3% at its mid-day low, closed 0.4% lower. The broad-based S&P 500 Index similarly lost 0.3%. The small-cap Russell 2000 and S&P MidCap 400 indices eased 0.4% and 0.1% respectively. All the main stock market indexes closed near their intraday highs.
Total volume in the NYSE ticked 6% higher, while volume in the Nasdaq rose 7% above the previous day's level. The higher turnover across the board had mixed implications for the major indices. Since the S&P 500 declined on higher volume, the index registered a bearish "distribution day." However, the Nasdaq's slight gain on increased trade technically enabled the index to score a bullish "accumulation day." Overall, divergence amongst the major indices was the dominant theme of yesterday's session. Because we have previously pointed out the broad market's indecisive state over the past week, such price divergence was not surprising.
One of the strongest and best-trending ETFs in September and the first half of this month was iShares Silver Trust (NYSEARCA:SLV). After it broke out above resistance in late August, SLV logged eight straight weeks of gains (including one flat week). During this period, its uptrend was so strong that it never even pulled back below very short-term support of its 10-day moving average. This is something that only the absolute strongest stocks and ETFs in the market manage to do for such a long period of time. On October 19, SLV finally gapped down to retrace slightly from its all-time high. Since then, it has been trading in a tight, sideways consolidation pattern. This is shown on the daily chart of SLV below:
Although SLV has finally corrected below its 10-day moving average (dotted red line), it has only barely kissed its 20-day exponential moving average (thin beige line). As mentioned in my book, Trading ETFs: Gaining An Edge With Technical Analysis, the first pullback of a strongly trending ETF that touches or "undercuts" its 20-day exponential moving average usually presents a low-risk buying opportunity in anticipation of a resumption of the dominant trend. As such, we are monitoring SLV for potential buy entry in the near-term. Specifically, we would like to see an "undercut" of the 20-day exponential moving average, which would shake out the "weak hands," OR additional price consolidation for the next one to two weeks, followed by a breakout above the tight range. Either scenario would present an ideal buying opportunity with a positive reward-risk ratio. If these parameters are met and we enter SLV, we will promptly send an Intraday Trade Alert to regular subscribers with new trade details.
As a group, international emerging markets ETFs have been one of the strongest sectors for the past several months. Many have similar patterns to SLV, as they have been trading at new record highs, and have not even pulled back to test support of their 20-day exponential moving averages. . .until yesterday. Now, we are finally seeing healthy retracements off their highs, which could lead to a short-term period of price consolidation that subsequently resolves itself with another leg higher and resumption of the dominant uptrend. Below are annotated charts of several international ETFs that have entered into pullback mode and could be setting up for possible long entry in the coming weeks. Consider putting these on your watchlist:
Yesterday, most ETFs that track the long-term U.S. government treasury bonds fell below key levels of horizontal price support. This correspondingly caused our long position in ProShares UltraShort 20+ Year Treasury (NYSEARCA:TBT) to breakout above resistance. With a "higher low" recently established, followed by yesterday's rally to a "higher high," it appears a reversal of the long-term downtrend in TBT is underway. The daily chart of TBT is shown below:
If yesterday's indecisive intraday price action and divergence in the broad market is any indication, one should be prepared for continued choppy conditions going into today. Strength in the semiconductor sector, which caused several semiconductor ETFs to break out above resistance yesterday, is helping the Nasdaq remain near its highs. However, the breakouts in the semiconductor ETFs are "late to the party," and therefore have a higher risk of failure. Furthermore, the weak financial sector continues to weigh on the broader S&P benchmark. With the main stock market indexes at major levels of price resistance on their long-term monthly charts (as illustrated earlier this week in The Wagner Daily), it is prudent to remain alert on the long side of the market, while continuing to take advantage of select sectors of strength while it lasts.
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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