December 13, 2010
All the major indices closed up on Friday, with higher beta issues leading the advance. But as has been common lately, volume was tepid. Early morning trade was choppy, though stocks broke through resistance at the 11:30 am reversal period and rallied at a steady pace throughout the afternoon. The small-cap Russell 2000 was again the biggest gainer on the session, as it closed 1.2% higher. The S&P MidCap 400 and the Nasdaq advanced 1.0% and 0.8% respectively. The S&P 500 rose 0.6%, as the Dow Jones Industrial Average realized a more modest 0.4% improvement for the day. For the week, the Dow significantly lagged both the Nasdaq and S&P 500. While the Nasdaq and S&P 500 posted respective gains of 1.8% and 1.3%, the Dow eked out an unimpressive 0.2% gain over the last five sessions.
For both indices, turnover finished lower than the previous day's levels. Turnover was off by 11% on the Nasdaq, but only 2% on the Big Board. Advancing volume outpaced declining volume on both exchanges by 3.5 to 1. Despite lackluster internals, the broad market appears to be on the brink of a major breakout. As stated several times in recent newsletters, the Dow probably holds the key to the advance. If the Dow can break above the November swing high, volume should spike to confirm institutional commitment.
On Friday, the iShares Dow Jones Medical Devices ETF (NYSEARCA:IHI) skyrocketed through resistance on serious volume to set a new six-month high. The breakout of this ETF was an extremely bullish move. Not only was volume nearly six times greater than the 50-day moving average, but it also accounted for almost 75% of last week's volume. Further, IHI opened at the low and closed almost at the high of the day. This type of price action following a strong gap-up makes the move all the more impressive. The strong volume points directly to institutional accumulation and suggests significant upside potential. A pullback to the May 6th high of $57.28 provides a potential buy trigger for IHI. It's often difficult to get a good entry on explosive moves. One strategy to deal with this situation is to take on a smaller position and set a wider stop. The market rarely provides a perfect entry point on explosive moves:
The iShares MSCI Chile Investable Market Index ETF (BATS:ECH) has been consolidating between $75.00 and $80.00 for the past six weeks. This follows a breakout from a seven-week trading zone, which now serves as support (see weekly chart below). Further, on the daily chart, this ETF has been coiling in a tight zone since testing support on November 16th. This consolidation has been accompanied by declining volume, which is generally considered bullish. ECH has also demonstrated relative strength compared to other emerging market ETFs. A break above the 4-day high of $79.00 on strong volume would likely provide a buying opportunity for ECH. We are monitoring this ETF closely for a possible entry:
The market appears as if it may rally for the balance of the year. A breakout in the Dow and an increase in market volume would probably confirm this opinion. However, the Dow needs to confirm very soon. Otherwise, a sudden breakdown below recent support in the Dow would likely hold the broad market in check.
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.
DISCLAIMER: There is a risk for substantial losses trading securities and commodities. This material is for information purposes only and should not be construed as an offer or solicitation of an offer to buy or sell any securities. Morpheus Trading, LLC (hereinafter "The Company") is not a licensed broker, broker-dealer, market maker, investment banker, investment advisor, analyst or underwriter. This discussion contains forward-looking statements that involve risks and uncertainties. A stock's actual results could differ materially from descriptions given. The companies discussed in this report have not approved any statements made by The Company. Please consult a broker or financial planner before purchasing or selling any securities discussed in The Wagner Daily (hereinafter "The Newsletter"). The Company has not been compensated by any of the companies listed herein, or by their affiliates, agents, officers or employees for the preparation and distribution of any materials in The Newsletter. The Company and/or its affiliates, officers, directors and employees may or may not buy, sell or have positions in the securities discussed in The Newsletter and may profit in the event the shares of the companies discussed in The Newsletter rise or fall in value. Past performance never guarantees future results.
Charts created by TradeStation (tradestation.com).
Â© 2002-2010 Morpheus Trading, LLC
Reproduction without permission is strictly prohibited.