A negative reaction to earnings reports from IBM, Texas Instruments, and Goldman Sachs caused stocks to gap sharply lower yesterday morning, but the major indices subsequently staged an impressive reversal that led to solid gains across the board. The broad market began recovering immediately after the open, then never looked back. The S&P 500, down 1.4% on the open, rose 2.5% intraday to finish the day 1.1% higher. The Nasdaq Composite and Dow Jones Industrial Average followed similar intraday patterns before advancing 1.1% and 0.7% respectively. Small and mid-cap stocks turned in the best performance. The Russell 2000 jumped 1.8% and the S&P Midcap 400 Index climbed 1.5%. All the main stock market indexes closed at their highest levels of the session.
This time, higher volume across the board confirmed the stock market rally. Total volume in the NYSE rose 18% above the previous day's level, while turnover in the Nasdaq ticked 16% higher. Market internals were also firmly positive. In the NYSE, advancing volume beat declining volume by 5 to 1. The Nasdaq adv/dec volume ratio was positive by nearly 3 to 1. The market's solid gains on higher volume enabled both the S&P and Nasdaq to register a bullish "accumulation day," indicative of buying participation amongst mutual funds, hedge funds, and other institutions. The lack of solid volume on most of the market's recent "up" days has been a large factor behind the choppy conditions and lack of follow-through we've been seeing lately. As such, it was encouraging to finally see the backing of institutional participation, though we're definitely not "out of the woods" yet.
Yesterday, several ETFs on our long watchlist turned in strong performances that caused them to either break out above resistance, or close within a few cents of doing so. Our model portfolio is already positioned with five ETFs, each of which is presently showing an unrealized gain. However, we will buy at least a partial position of Market Vectors Brazil Small-Cap (NYSEARCA:BRF), if it rallies above yesterday's high in today's session:
Because the model ETF portfolio is presently near its maximum buying power, we will probably only enter one more position (or none) within the next few days. But for traders looking for additional "self-serve" trade opportunities, we've listed a few other bullish ETF setups to consider below. Note that none of these ETFs will be tracked in the model portfolio, unless specifically entered as "official" trades:
In yesterday's commentary, we said there was a decent chance the broad market's higher volume selling of July 16, followed by the lighter volume bounce on July 19, could send stocks back down to test their early July lows. However, we also said the market's recent indecision made it "equally likely stocks will just chop around in a sideways range in the near-term." Given yesterday's sharp gap down and subsequent bullish reversal, the latter scenario is definitely playing out. Going into today, most of the major indices are in "no man's land," just above the middle of their respective ranges from the June highs to July lows. Meanwhile, key moving averages continue to act as overhead resistance. This is apparent on the daily chart of the Nasdaq Composite below:
Due to yesterday's bullish, higher volume reversal, near-term momentum could easily enable the S&P and Nasdaq to move back above their 50-day moving averages this time around. . . but then what? Resistance of the prior highs from June will be a pivotal level of resistance the major indices would need to contend with if they move back above their 50 and/or 200-day moving averages. While near-term sentiment may now favor the bulls, only a convincing rally above the June highs would reverse the broad market's intermediate-term downtrend that remains intact. As we did with buying the Semiconductor HOLDR (NYSEARCA:SMH) on the July 16 pullback, it may be a good idea to grab one or two long positions with relative strength. However, it's wise to view the trade as short-term. Don't get greedy, and be prepared hit the sell button to lock in profits at a moment's notice. Finally, bear in mind that a rally back to major resistance of the June highs would probably tip the overall reward-risk ratio back in favor of the bears.
Open ETF positions: |
Long - DBA, TLT, UNG, SMH
Short (including inversely correlated "short ETFs") - GDX
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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Disclosure: Long DBA, Long TLT, Long UNG, Long SMH, Short GDX