Commentary:
Yesterday’s broad market performance kicked off the month of December on a bullish note as the S&P 500 Index, Nasdaq Composite, and Dow Jones Industrial Average each broke out and closed at new 52-week highs. Volume in both the NYSE and Nasdaq increased sharply over last Friday’s holiday-shortened session, but still came in just below its 50-day average. While the increase in volume confirmed the breakout, we are no longer seeing the kind of volume surges that accompanied breakouts to new 52-week highs a few months ago. Nevertheless, advancing volume outpaced declining volume by a healthy margin of 4.7 to 1 in the NYSE, but only 2.6 to 1 in the laggard Nasdaq.
Of the broad-based ETFs, SPY (S&P 500 Index) had the cleanest breakout and firmly closed at a new high yesterday. DIA (Dow Jones Indu. Avg.) also closed at a new 52-week high, but did not close above its previous intraday resistance from November. The Nasdaq lagged even more, as QQQ was the only one of the “big three” broad-based ETFs that did not close at a new 52-week high. The three daily charts below illustrate how the S&P clearly showed relative strength and diverged from both the Dow Jones and Nasdaq yesterday:
The daily charts above may give the illusion that yesterday’s gains came in the form of an uptrending day, but the reality is that the gains came on the heels of an indecisive and erratic trading session. Each of the major indices began the day with an opening gap above last week’s respective highs, but the remainder of the day was filled with a series of false breakouts, breakdowns and mid-day reversals. Below is a 15-minute chart of QQQ (Nasdaq 100 Index) that illustrates the extent of yesterday’s indecisive trading session. The S&P 500 and Dow Jones Industrials both showed relative strength to the Nasdaq, but still traded erratically:
As you can see on the chart above, yesterday was definitely not a smoothly trending day and the numerous intraday reversals, caused by indecision, made it difficult to “let the winners ride” without using loose stops. Yesterday’s intraday price action was similar to the roller-coaster ride the indices participated in on November 26, right before Thanksgiving Day. While this type of price action is fine for multi-day “swing” traders who use loose stops, it was difficult for intraday trend traders unless they were “scalping.” QQQ’s inability to follow suit and break out to a new high with SPY means that the head and shoulders pattern on the daily chart is still technically intact, so we remain short with a stop just over the high at 36.20.
One of the reasons for the relative weakness in the Nasdaq yesterday was due to weakness in the heavily-weighted SOX (Semiconductor) Index. Typically, the Nasdaq won’t get very far without the Semis leading the way and the Semis were one of the weakest sectors yesterday. This is not surprising because Cyclicals were strong and there is often an inverse relationship between “old economy” sectors such as the Cyclicals and more aggressive growth sectors such as Semiconductors. Retail sector was also weak and the market was apparently not pleased with the numbers from the first official shopping day of the holiday season on Black Friday. As such, we initiated a short position in RTH (Retail HOLDR) when it broke below its 20-day MA yesterday. We also profited from a long position in PPH due to a move higher in the Pharmaceutical Index. However, most of the gains came in the form of an opening gap up, and the afternoon reversal in the broad market caused PPH to hit our trailing stop for only a small gain. The Homebuilder Index ($DJUSHB) and Gold Index ($GOX) were once again the leading sectors yesterday, although Gold showed losses in the morning. EWJ (Japan Fund) closed firmly above its 50-day moving average yesterday, so we will look for a long re-entry point after it shows a few days of stabilization. Finally, the Biotechnology index showed relative strength and BBH broke out above its primary downtrend line and 50-day moving average yesterday. We are looking to buy BBH for a swing trade today, as detailed in “today’s watch list” below.
Throughout the first half of November, each breakout to a new 52-week high by the major indices failed to hold and subsequently sold off the very next day. This eventually led to a test of the 50-day moving averages later in the month. Therefore, we need to be on guard for the potential of the same type of pattern this time around. If the major indices fail to hold on to yesterday’s gains, we may be looking at a repeat scenario of what occurred in early November. We also need to keep a close eye on the Nasdaq, which has been lagging behind the S&P because it is unlikely that the S&P will go very far without the Nasdaq in sync. However, if the Nasdaq and Dow act well today AND the S&P holds on to all of yesterday’s gains, then we may finally see a clear and sustainable breakout that will provide us with numerous trading opportunities. If the broad market attempts to break yesterday’s highs, watch the market’s total volume closely. If the volume is coming in lower than yesterday, we would be very skeptical and cautious about any breakouts. Just look at yesterday’s intraday price action and you’ll see why caution is in order.
Today’s watch list:
BBH – Biotechnology HOLDR
Long
Trigger = above 130.58
(above yesterday’s high)
Target = 134.90 (retest of prior highs from early October)
Stop =
128.50 (below the breakout level)
Notes = On the chart above, notice how BBH broke out and closed above its 50-day MA for the first time since October 14. It also closed above the downtrend line from the high of September 19. Therefore, we anticipate BBH will at least rally up to test its prior highs around 135.
Daily Reality Report:
Below is Morpheus Trading Group’s daily
performance report of closed trades and an update on all open positions from The
Wagner Daily (Intraday Real-Time Room trades are reported separately in The
Wagner Weekly). Net P/L figures are based on the quantity of shares represented
in the MTG
Position Sizing Model.
Closed Positions:
- OIH long (1/2 position from Nov. 25) –
bought 54.50, sold 55.65, points = + 1.15, net P/L = +
$56
PPH long (from Dec. 1) –
bought 75.30, sold 75.55, points = + 0.25, net P/L = +
$23
Open Positions:
-
RTH short (from Dec. 1) –
shorted 92.72, stop 95.10, target 85.50, unrealized points = (0.70), unrealized P/L = ($70)
QQQ short (averaged from Nov. 26 and Dec. 1) –
shorted 35.29 (avg.), stop at 36.20, target 31.50, unrealized points = (0.61), unrealized P/L =
($244)
Notes:
OIH hit our trailing stop yesterday, so we closed it out with a + 1.15 point gain. We bought PPH on the breakout yesterday, but the mid-afternoon trend reversal hit our trailing stop. We shorted RTH per yesterday’s newsletter and remain short in anticipation of the head and shoulders pattern following through. We also shorted the second half of QQQ when it broke to a new low yesterday afternoon, but the final reversal into the close caused the additional shares to go against us a bit. Will adjust stops and e-mail updates as we see fit.
Edited by Deron Wagner,
MTG Founder and President