October 1, 2010
Stocks concluded a very solid month of September with a day of uneventful price action yesterday, as the major indices registered moderate losses. On the open, the S&P 500 Index gapped above the highs of its recent range (beyond the 1150 level), but traders immediately sold into strength, causing the intraday breakout attempt to quickly fail. Thereafter, the broad market trended lower throughout the morning, then recovered slightly in the afternoon. Both the S&P 500 Index and Nasdaq Composite declined 0.3%. The Dow Jones was lower by 0.4%. Small and mid-cap stocks again showed relative strength. The Russell 2000 slipped just 0.2%, while the S&P MidCap 400 eked out a gain of 0.1%. All the main stock market indexes closed near the bottom quarter of their intraday trading ranges.
The failed intraday breakout attempt was negative, but worse was the substantially higher volume that accompanied yesterday's decline. Total volume in the NYSE jumped 27% and turnover in the Nasdaq was 12% higher than the previous day's level. The higher volume losses caused both the S&P and Nasdaq to register a bearish "distribution day," the second such occurrence of institutional selling in recent weeks. An occasional decline on increased trade is normal, and can usually be absorbed by a healthy market. But if the "distribution day" count exceeds three days within a short period of time, a substantial market correction usually follows.
Despite yesterday's moderate decline in the broad market, 4 of the 5 open positions in our model ETF portfolio moved higher yesterday. This is primarily because most of the positions in our portfolio have a low overall correlation to the direction of the broad market. Each of the four positions that rose yesterday is also showing an unrealized gain since its entry point. To recap, those positions are: iShares JP Morgan Emerging Markets Bond Fund (NYSEARCA:EMB), iPath S&P 500 VIX Mid-Term Futures (NYSEARCA:VXZ), JP Morgan Alerian MLP Index ETN (NYSEARCA:AMJ), and iShares Nasdaq Biotechnology Index Fund (NASDAQ:IBB). The sole position presently showing a slight loss, and the only one that did not move higher yesterday, is ProShares UltraShort Yen (NYSEARCA:YCS). For subscribers who are in these positions, let's take an updated technical look at the charts of all five. On each of the annotated charts below, the pink rectangle marks the day of trade entry:
In recent days, we've been discussing the importance of the S&P 500 Index breaking out above the pivotal 1150 resistance level. Yesterday, the index probed above that level on an intraday basis, but failed to close above it. As such, the S&P 500 remains in a sideways consolidation pattern. The 1150 level is still important, but now there is additional overhead supply created from yesterday's failed breakout attempt. Overall, the trend continues to favor the bulls, but yesterday's bearish intraday price action and higher volume losses could be a warning sign that the buyers are running out of gas (at least in the near-term). Although the market has not yet given sufficient reason to consider new entries on the short side, prudent traders may consider tightening stops on existing long positions with significant correlation to broad market direction. This will enable one to lock in gains in the event of a pullback.
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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