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Stock Market Timing Model Shifts To New "Buy" Mode

|Includes: DIA, IWM, MDY, QQQ, SPDR S&P 500 Trust ETF (SPY)

Stocks put in a good showing last Friday as volume increased. The Nasdaq Composite led all indices as it tacked on a solid 1.3%. The small-cap Russell 2000 added 1.2%, while both the S&P 500 and the S&P MidCap 400 posted gains of 1.0%. The Dow Jones Industrial Average lagged slightly, ending the day up 0.9%.

Market internals remained bullish for a second consecutive session. As might be expected on a monthly options expiration day, turnover increased significantly. On the Nasdaq, volume surged 21.0%. NYSE turnover ticked 17.3% higher. Advancing volume also held the upper hand, as it topped declining volume on the Nasdaq by a factor of 4.8 to 1 and on NYSE by a factor of 4.3 to 1. Institutions were clearly involved in Friday's price action. This resulted in both an "accumulation day" and a "follow-through day" on both exchanges.

Among other factors, last Friday's heavy volume "accumulation day" in the Nasdaq, indicative of buying amongst mutual funds, hedge funds, banks, and other institutions, caused our disciplined, rule-based market timing model to shift from an intermediate-term "sell" to "buy" signal (click here for an overview of the four modes of our market timing model). There was also big volume in the S&P 500, which helped to confirm the strong action in the Nasdaq. Nevertheless, it is important to note our new "buy" signal is not yet confirmed, as we still need to more confirmation in the form of leading stocks breaking out to new highs and holding. We should also see a significant pick up in the number of stocks hitting new 52-week highs versus stocks falling to new 52-week lows.

One might reasonably argue that much of last Friday's volume spike was due to options expiration (and not real buying interest), and that could be true. Still, that doesn't play a big part in our decision making because we always start off with reduced position sizing when we shift in to a new buy mode. This enables to start with reduced capital risk, which we gradually increase as more price and volume confirmation is received. If anything, the main point of concern we have with the current buy signal is that the major averages (S&P 500, Nasdaq, and Dow) are still trading below their 50-day moving averages. However, that could easily change with just one or two days of sharp upward price action in the broad market.

The commentary above is an excerpt from The Wagner Daily swing trading newsletter. Subscribers to the full version receive our exact entry and exit prices for swing trades of the top stock and ETF picks, access to our market timing model, and more. Sign up for your 30-day risk-free trial to our stock newsletter today (less than $2 per day based on annual subscription).

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