Stocks concluded the month of July in uneventful fashion, as all the major indices finished near the flat line last Friday. The broad market gapped lower on the open, recovered shortly thereafter, the indecisively chopped around in a range throughout the rest of the day. Both the S&P 500 and Dow Jones Industrial Average were unchanged. The Nasdaq Composite eked out a gain of 0.1%. The small-cap Russell 2000 also edged 0.1% higher, as the S&P Midcap 400 gained 0.3%. The main stock market indexes closed around the upper quarter of their intraday ranges. For the week, the broad-based indexes were little changed as well.
As is commonly the case with trendless, range-bound days, turnover eased across the board. Total volume in the NYSE was 1% lighter than the previous day's level, while volume in the Nasdaq receded 11%. In both exchanges, volume was lower than 50-day average levels. In the NYSE, it has actually been more than two weeks since trading registered a faster than average pace. Because August is a month when many American traders and investors take an annual vacation, we don't really expect to see a significant increase in overall volume levels until after the summer doldrums have passed.
For the past week, we've been monitoring a list of ETFs for potential buy entry on a significant pullback. Last Friday, one of those ETFs, Claymore Global Solar Energy Index (NYSEARCA:TAN), gapped down to short-term support of its 20-day exponential moving average (NYSEMKT:EMA), presenting us with a low-risk buy entry point above that day's high. The setup is shown on the daily chart of TAN below:
We like TAN because of the relative strength it has been showing to the broad market for the past two months. While the main stock market indexes have been stuck in a range, below resistance of their June 2010 highs, TAN has entered into a new, intermediate-term uptrend. Two "higher highs" and "higher lows" have formed since the lows formed in early June. Now, TAN has now pulled back to support of its June high (the breakout level), which converges with the 20-day EMA (the beige line), making a positive reward-risk ratio for new long entry (regular subscribers should note our detailed trigger, stop, and target prices for the TAN setup in "Today's Watchlist" below). Looking at the longer-term weekly chart, which removes the "noise" from the daily timeframe, we see TAN broke out above a seven-month downtrend line as well. This indicates a substantial change of intermediate to long-term sentiment in the ETF:
Today, traders and investors should keep an eye on iPath India Index (NYSEARCA:INP) as well. Another ETF that has been on our watchlist for more than a week, INP may now be poised to finally break out above the high of its tight, six-week price consolidation. The trigger price for potential buy entry is above the July 29 high of $66.33, represented by the horizontal line on the weekly chart below:
Although last week's broad market price action was lacking substance, the Nasdaq Composite has pulled back to a level that could spark a short-term rally. Specifically, the index has retraced to new support of the prior, intermediate-term downtrend line it broke out above last month. This level also converges with support of the 20 and 50-day moving averages, further increasing the odds of a rally from here. We've annotated the pattern on the daily chart of the Nasdaq below:
As pointed out in last Friday's commentary, the S&P 500 has been struggling with resistance of its 200-day moving average, as well as its 50% Fibonacci retracement (from the April high to July low). As such, any rally attempt from here may still be choppy and unconvincing. Nevertheless, the charts indicate the near-term trend probably favors the bulls. As for the intermediate-term trend, the market's next major move will depend on whether or not the major indices are able to overcome key resistance of their June 2010 highs.
Open ETF positions: |
Long - DBA, UNG, TLT, UUP
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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