A choppy, range-bound session of trading last Friday capped a negative week of trading, as the major indices finished the day with mixed results. The S&P 500 and Nasdaq Composite both ticked 0.3% higher, but the Dow Jones Industrial Average edged 0.1% lower. All three indexes closed in the middle of their intraday ranges. Notable relative strength was found in the small-cap Russell 2000 Index, which cruised 1.9% higher and settled near its high of the day. The S&P Midcap 400 Index also outperformed with a 1.1% gain. When small and mid-cap stocks show significant relative strength to the broad market during a recovery attempt, it is a bullish signal that points to increased appetite for risk amongst investors and traders.
Artificially inflated due to last Friday's annual rebalancing of the Russell indexes, turnover surged higher across the board. Total volume in the NYSE was 84% stronger than the previous day's level, while volume in the Nasdaq similarly increased 70% above the previous day's level. Once a year, various funds that track the small-cap Russell indexes are forced to rebalance their portfolios when underperforming stocks within the indexes are removed and replaced by new leaders. This obviously causes trading in both exchanges to spike higher. As such, the price to volume relationship of the market in last Friday's session was inconclusive.
Comprised of a basket of agricultural commodities futures contracts, PowerShares Agriculture Fund (NYSEARCA:DBA) appears to be reversing its long-term downtrend, and is now showing signs of relative strength. While the S&P 500 lost 3.5% last week, DBA gained 0.5%. More importantly, DBA has broken out above resistance of a 6-month downtrend line, and is now consolidating in a tight range, just above new support of its 50-day MA. A move above its June 21 high of $24.43 (the high of the recent range) would trigger a potential entry point for traders looking to take advantage of the intermediate-term trend reversal. The setup is annotated on the daily chart of DBA below (regular subscribers to The Wagner Daily should also note our detailed trigger, stop, and target prices for today's setup):
Going into this week, gold bugs will be closely monitoring the performance of spot gold, which is testing a pivotal level of price resistance. This is illustrated on the daily chart of SPDR Gold Trust (NYSEARCA:GLD), a popular ETF proxy for the price of the spot gold commodity futures:
On June 18, GLD gapped up to an all-time closing high of $122.83. However, it sold off sharply the following day, causing the initial breakout to fail. Still, the 20-day exponential moving average (the beige line) provided support, and GLD made another attempt to break out above its range on June 25. As marked by the dashed horizontal line, GLD has moved above horizontal price resistance, but has not yet convincingly broken out. A rally above the June 18 intraday high of $123.50 would enable GLD to clearly break out to a new record high. If such a breakout occurs, short-term traders may be able to profit from momentum of a quick, upward surge, but a tight stop below the breakout level is still recommended, just to protect against another failed breakout (which would not be surprising in this environment).
Last week's pullback in the broad market caused the main stock market indexes to retrace about half the gains of the bounce off the June lows. In doing so, prices of the main stock market indexes formed clearly-defined "swing high" resistance levels. A subsequent rally above those levels would confirm a reversal of the primary downtrend of the broad market, which began back in April. This week, we will be closely monitoring the current pullback to determine if new lows are formed, or if higher "swing lows" become established. If new lows are posted, it would be a continuation of the bearish trend that has been in place for several months. But if a "higher low" and subsequent "higher high" is formed, the overall tone and sentiment of the stock market should improve substantially. Finally, keep in the back of your mind that each of the major indices is still forming the right shoulder of a bearish "head and shoulders" pattern on its weekly chart. ETFs with a low correlation to the direction of the stock market (currency, commodity, fixed-income, etc.) are probably the best bet in range-bound or indecisive markets, which is already the composition of most of our portfolio.
Open ETF positions: |
Long - UNG, TLT, UUP
Short (including inversely correlated "short ETFs") - USO
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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Disclosure: Long UNG, Long TLT, Long UUP, Short USO