October 5, 2010
Registering a substantial round of losses across the board, the major indices pulled back yesterday, but lighter turnover softened the blow. Stocks trended steadily lower throughout the morning, found support at mid-day, then bounced around near their lows in the afternoon. The Dow Jones Industrial Average lost 0.7%, the S&P 500 Index 0.8%, and the Nasdaq Composite 1.1%. The small-cap Russell 2000 and the S&P MidCap 400 fell 1.4% and 1.0% respectively. The main stock market indexes closed in the bottom third of their intraday trading ranges.
The bright spot of yesterday's session is that volume eased in both exchanges. Total volume in the NYSE was 13% lighter than the previous day's level, while trade in the Nasdaq edged 1% lower. The reduced turnover enabled both the S&P and Nasdaq to dodge the label of another bearish "distribution day." Another session of higher volume selling would've been negative, as it would have been the fourth day of higher volume losses within a short period of time. In the NYSE, declining volume exceeded advancing volume by approximately 4 to 1. The Nasdaq adv/dec volume ratio was negative by about 3 to 1.
In the September 30 issue of The Wagner Daily, we said, "Alternative energy is one industry that has suddenly started showing a lot of relative strength, indicating that institutions have begun rotating funds into the sector. Yesterday, PowerShares Clean Energy (NYSEARCA:PBW) broke out above key resistance of its prior highs from July, as well as its 200 day moving average. Perhaps most importantly, volume spiked to more than 300% its average daily level...Based on the combination of a breakout above horizontal price resistance, relative strength, strong volume, and the recent reversal of the dominant downtrend, we like PBW for long entry on any slight pullback. Ideally, a quick retracement to near yesterday's (September 29) low, which correlates with the breakout level, would provide a lower-risk entry point than buying near the current price." Yesterday, that pullback came, giving traders a decent entry point into PBW. An updated daily chart of PBW is shown below:
As shown on the chart above, PBW has retraced to support of its prior breakout level from the July high, as well as major support of its 200-day MA. The rising 20-day exponential moving average (dotted beige line), just below the 200-day MA, also provides support. Given the high volume breakout of September 29, in which volume surged to more than 300% is average daily level, we believe the current pullback provides a positive reward - risk ratio for new trade entry into PBW. However, we prefer to wait at least one more day for the price action to settle down, rather than simply buying at market today. Ideally, we would like to see a tight intraday range today, which would provide for an ideal buy entry above today's high, in tomorrow's session.
While yesterday's correction was significant, there were not enough major changes to the technical picture to suggest further downside is imminent. The S&P 500, Dow Jones, and Nasdaq are still contained within the channels of their recent price consolidations, and each index is still above its 20-day exponential moving average as well. As mentioned earlier, it's also encouraging that the broad market managed to avoid another "distribution day" yesterday. Nevertheless, bullish sentiment may slowly be changing, so caution on the long side remains in order. But overall, the major indices' consolidation patterns near their recent highs favors the bulls, and could lead to another leg up in the near-term.
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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