The Wagner Daily - July 8, 2011
Concise technical analysis and picks of the leading global ETFs
Buoyed by solid volume stocks posted an impressive eighth consecutive day of gains on Thursday. Except for the DJIA, all of the major indices closed more than one percent higher. The rally was led by the small-cap Russell 2000 as it posted an impressive 1.6% gain. The Nasdaq improved by 1.4% while both the S&P MidCap 400 and the S&P 500 added 1.0% for the session. The Dow Jones Industrial Average was the day's laggard but still managed to advance by 0.7%.
Market internals were strong on Thursday but much of the rally was attributable to lagging sectors. This is often a signal that it is time to take profits on any long positions and wait for the next pullback to enter new positions. Trade was higher across the board. Volume increased by 15.2% on the Nasdaq and 5.2% on the NYSE. For a second consecutive day advancing volume overpowered declining volume. By the closing bell the spread ratio was at 4.6 to 1 on the NYSE and 5.4 to 1 on the Nasdaq. The uptick in volume accompanied by higher advancing volume clearly suggests that institutions were actively involved in yesterday's advance. Therefore we would consider Thursday an accumulation day for the market.
Our nightly research failed to produce much in the way of actionable buy setups, so today's report will focus on potential low-risk pullback entries. The iShares MSCI Malaysia Index Fund (NYSEARCA:EWM) broke out to new 52-week highs last week, allowing us to sell our long position into strength on July 1st for a quick gain. Ideally we would like to see the price action undercut the low of July 5th and form a bullish reversal bar above support of the breakout pivot and the rising 20-day EMA, around the 15.20 area. If EWM holds above 15.30 next week, then we could see more of a shallow, bull flag type continuation pattern develop.
After breaking above the downtrend line and reclaiming its 50-day moving average in late June, the SPDRs Select Sector Health Care (NYSEARCA:XLV) appears to be stalling out at resistance from the May 31st high around 36.00. XLV is extended in the short-term, but could potentially be in play on a pullback to support of the rising 20-day and 50-day moving averages near 35.50. We'd like to see XLV consolidate for a week in order to build out the right side of the pattern, which could end up looking like the pattern we have drawn in on the chart below.
The market continues to show resiliency but the risk/reward for taking on long positions at the current levels is for the most part not favorable. For the moment we are inclined to be patient and search for new long setups on a pullback. We are also tracking several of the weaker sectors for possible short entries. Banks and semiconductors might offer short plays when the market takes its next breather.
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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