Traders returned from the holidays in buying mode and caused broad-based gains as total market volume surged. Both the S&P 500 Index and Dow Jones Industrials gapped up and opened in the “chop zone” that we discussed in yesterday’s newsletter, but buyers quickly stepped in and pushed both indices to test the previous day’s highs. After being unable to break their respective highs of the previous day, both the S&P and Dow saw a wave of selling at mid-day that caused them both to test their intraday lows. However, strength in the Nasdaq enabled both indices to recover later in the afternoon. A final buying surge during the final ninety minutes of trading eventually pushed both the S&P and Dow to close at new 52-week highs. The Nasdaq Composite, which showed relative strength to both the S&P and Dow yesterday, gapped up to the previous day’s high, rallied above it within the first fifteen minutes of trading, and never looked back. When the S&P rolled over and tested its intraday lows at mid-day, the Nasdaq remained near its highs, thanks to strength in the Semiconductors ($SOX). Remember that the SOX usually leads the Nasdaq and the Nasdaq often leads the S&P and Dow. The Nasdaq Composite closed firmly at a new 52-week high with a gain of 2.0% yesterday, while both the S&P and Dow closed approximately 1.25% higher. The Russell 2000 Small Cap Index lagged behind and was the only major broad-market index that did not close at a new 52-week high, despite its 1.1% gain.
The most bullish factor of yesterday’s action was not simply the gains, but the sharp increase in volume that accompanied them. Volume in the NYSE increased 38% over the previous day and came in well above its 50-day average. It was the highest volume day in the NYSE since October 30. Even more impressive was the volume increase in the Nasdaq, which rose 41% over the previous day’s level and was the highest day in seven months! The sharp increase in volume, combined with the fact that each of the major indices closed higher, means that yesterday was technically an “accumulation day.” Nearly every major market sector participated in yesterday’s rally, from Semiconductors to Gold Mining stocks, which signals to us that institutions were behind the bulk of the buying, unlike the retail buying during the prior two-week holiday period.
If you look at a daily chart of QQQ (Nasdaq 100 Index), you will notice that the former resistance band from $36 to $36.18, which we discussed extensively throughout the first half of December, acted perfectly as support when QQQ retraced last week. This enabled QQQ to build a short base and rally to new highs yesterday. The daily chart of QQQ below illustrates how the prior resistance just over $36 acted as support when the index corrected last week:
The chart above is a good example of the basic tenet of technical analysis that states prior resistance levels become the new support levels once the resistance is broken. Another chart I want to reference is the longer-term MONTHLY chart of DIA (Dow Jones Industrial Average). When we first brought this chart to your attention last week, the Dow was nearing major resistance of a downtrend line that has been in place for exactly three years. Since then, the Dow has rallied a bit more and is now testing this key resistance level. The monthly chart of DIA below illustrates this:
As you can see, the next one to two months will be very important for determining the direction of the Dow’s next major move. Until the Dow gives us reason to believe otherwise, we have to assume that the downtrend which has been in place for three years will continue. If that occurs, the next important element will be whether the Dow sells off to test its prior lows from October 2002 or if it sets a “higher low.” Either way, the resistance of a three-year downtrend line provides us with a high risk/reward ratio for taking an intermediate-term position in shorting DIA. If the Dow blasts through the trend line, we can cover the DIA short position for a small loss. But if the downtrend line remains intact and pushes the Dow lower, you will have a much greater potential for profit than the amount you are risking if you are wrong. By shorting DIA at current levels, you can risk 2 – 3 points for the ability to make 10 – 12 points even if DIA only retraces 1/3 of its gains from the October 2002 low. Obviously, the potential reward is much greater if the Dow retraced beyond the 1/3 level. You will notice we are listing DIA short as a trade setup for today, but realize we are entering the trade with the intention of it being a one to two month time horizon.
The Gold and Silver Mining index ($XAU) gapped up and rallied to a new high yesterday, as did many individual mining stocks such as ABX, PDG, and NEM. Correspondingly, gold futures closed at a new high of just under $425 per ounce, a level that has not been seen since March 1997. Even silver broke out to a new high of $6.24, a level not seen since September 1999. Hopefully some of you bought gold and silver coins or bullion when we first suggested the idea a few months ago. If you did, you now have a nice unrealized gain on your investment.
Another sector that has been showing a lot of strength lately is Telecom ($XTC). This sector has been dead over the past year, but is finally waking up. The sector broke out to a new 52-week high yesterday after building a base for the past year. Below is a weekly chart of the Telecom Index that illustrates the breakout:
Although we don’t trade it very often, TTH is the main ETF that tracks the Telecom Sector. TTH is the ticker for the Telecom HOLDR and you can view its components and weightings by going to www.holdrs.com. We will be looking at possibly taking a long position in TTH after it consolidates for a few days. Two additional sector ETFs that are breaking out to new highs and worthy of a look are SWH (Software) and HHH (Internets). OIH (Oil Service) also appears poised to break out of the base it has been forming for the past several weeks, which is the reason we entered a long position in the sector yesterday, via intraday e-mail alert. The Home Builder sector ($DJUSHB), which we have been trading on the short side, was very weak yesterday morning, but bounced off support of its prior lows from December 10 during the afternoon. Therefore, the index met our first target of 550 yesterday, which is the neckline of the head and shoulders pattern. We continue to remain bearish on that sector in anticipation of the head and shoulders pattern breaking below the neckline at the 550 level. Reference yesterday’s Wagner Daily for a chart of the sector. Finally, the Nanotech stocks began receiving a lot of media attention over the past few days and each turned in huge gains yesterday (SMMX, TINY, VECO, ALTI, NGEN, NANX, etc.).
Today’s watch list:
DIA – DIAMONDS (Dow Jones Industrial Average Index)
Trigger = below 105.20
(below yesterday afternoon’s prior resistance)
Target = 100.50 (test of the 10-week moving average)
Stop = 107.55 (above the monthly downtrend line)
Notes = Read commentary above for detailed description of the trade setup. Note that we will only be entering a HALF position of DIA (based on the MTG Position Sizing Model) if it triggers. We will, however, add to the position upon confirmation our timing is correct. Realize that the expected time horizon of this trade is 1 to 2 months if it triggers, so do not enter the trade unless you are willing to hold the position for that duration of time.
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.
OIH long (from Jan. 5) –
bought 62.15, new stop 61.45, target 65.70, unrealized points = + 0.40, unrealized P/L = + $40
We bought OIH per intraday e-mail alert yesterday and have raised the stop as per above.
Founder and President