Waiting for the S&P and Nasdaq to make up their minds


Trading was decidedly bullish on the day. The Consumer Discretionary and Financial sectors showed the best performance. Both advanced by 1.9%. Stocks gapped moderately higher at the open, but at 10:00 am staged an explosive rally that continued into the close. The major indices posted significant gains and closed near the highs of the day. However, there was some distribution in the last five minutes of the session. This is most likely attributable to late day profit taking, ahead of the Fed (FOMC) announcement Tuesday afternoon. The small-cap Russell 2000 led all indices by posting an impressive 2.9% gain during Monday’s session. The S&P MidCap 400 and Nasdaq each advanced 1.7%, while the S&P 500 and Dow Jones Industrial Average realized gains of 1.5% and 1.4% respectively. The breakout above key technical resistance of 1130 on the S&P 500 was most likely the key to the strength of the rally. Today’s move carried the S&P to a four month high.

As might be expected, volume declined following Friday’s quadruple witching, options expiration day. Turnover was significantly down on both the NYSE and the Nasdaq. For the day, volume on the NYSE dropped 37.0%, while Nasdaq volume declined 18%. Despite the large drop, on a relative basis, volume was about average on both indices. The ratio of advancing volume to declining volume painted a much brighter picture. NYSE advancing volume outpaced declining volume by an impressive 13 to 1 ratio. On the Nasdaq, advancing vs. declining volume was positive by a factor of 5 to 1.

The iShares Nasdaq Biotechnology Index Fund (IBB) trigger was hit yesterday, prompting our call for a long entry in this ETF (see trade details from yesterday’s newsletter). As discussed in the September 13th newsletter, a break above the neckline of this inverse head and shoulders pattern, suggests a rally to $93.50. We will also be keeping an eye on the gap formed on May 5th, as this may provide resistance if it is filled.
The Ultra Short Yen ProShares (YCS) continued its consolidation for the fourth consecutive day on Monday. This is generally a good sign for a long entry. We will continue to monitor YCS. At this moment, it remains on our radar, but is not yet an official call.

Due to the significant duration of the current rally and the looming FOMC announcement, this is probably a good time to be patient with regard to entering new positions. As such, we are more inclined to wait for the set ups to come to us, rather than manufacturing trades. The evaluation of the iShares DJ US Medical Devices Index Fund (IHI) provides a good example. As shown in the charts below, this ETF has demonstrated significant relative weakness to the overall market. When the next sell off occurs, IHI should present a good shorting opportunity. Note the under-performance of IHI when compared to the S&P 500 Index. While the S&P has surged to a 4 month high, IHI has struggled to rally above its downtrend line. Further, this ETF is trading well below the 200-day moving average. A rally into the 200-day MA would provide a potential entry point to short IHI. For the moment however, it is not prudent to fight the overall market trend. But, it is a good time look for shorting opportunities, or a pullback for long entries, as the market is likely to correct soon.

Today’s Watchlist:

There are no ETF’s on our watch list ahead of the FOMC.

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  • Per yesterday’s setup, IBB triggered our buy entry.

  • On the aggregate, stocks appear poised to continue the recent advance. Nonetheless, the language coming out of the FOMC meeting Tuesday could easily prompt a reversal. Caution should always be exercised ahead of a Fed announcement. Irrespective of the Fed announcement, a short term sell off would not come as a surprise.
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      Edited by Deron Wagner,
      MTG Founder and
      Head Trader