Commentary:
The Nasdaq Composite notched its fifth consecutive day of gains on higher volume yesterday, but, as expected, the 200-day moving average kept the rally in check. Yesterday’s 0.5% gain in the Nasdaq was entirely attributed to an opening gap up, as the index gapped up sharply, but subsequently traded sideways to lower, in a very tight intraday range. Both the S&P 500 and Dow Jones Industrials followed similar intraday patterns, but each index only gained 0.3% and 0.2% respectively.
Volume in the NYSE came in 3% lighter than the previous day, but was still at a respectable level and well above its 50-day average. Total market volume in the Nasdaq, however, increased 1.5% over the previous day, giving the index its fifth consecutive bullish “accumulation day.” You have to go all the way back to May to find the last time the Nasdaq closed higher for five consecutive days. Even then, only three of those five days were on higher volume than the previous day. Needless to say, the price to volume relationship in the Nasdaq has been extremely healthy for the past seven sessions, the importance of which should never be underestimated.
As anticipated in yesterday’s newsletter, the Nasdaq gapped up into its 200-day moving average, but failed to rally above it. This is to be expected because the 200-day moving average is very powerful, and any stock or index rarely pushes through resistance, or falls below support, of a 200-day MA on its first attempt. In a strong uptrend, a stock or index will typically bump into its 200-day MA, retrace a small amount, go sideways for approximately a week, then attempt to push through it again. If the momentum is strong enough, the breakout will often occur on the second test, but its not unusual for it to take three attempts in order to push through its resistance. As you may recall, this is what happened before the $XAU (Gold/Silver Mining Index) finally broke out above its 200-day MA on September 21. As such, we continue to remain bullish on the intermediate-term direction of the Nasdaq, but feel the index may trade sideways to slightly lower in the short-term. The daily chart of the Nasdaq below illustrates how the 200-day MA perfectly acted as resistance to mark yesterday’s intraday high:
While we continue to remain bullish and maintain long positions in the Gold/Silver sector, we recently initiated short positions in the Home Construction Index ($DJUSHB). As you probably know, the $DJUSHB has been one of the top sectors of the past five years, having rallied more than 230% in the past four years. Low interest rates have largely been the impetus behind the strength in the home builders, but the index is now beginning to show signs of a major top. Specifically, the $DJUSHB has formed its first “lower high” on the monthly chart since the rally began more than four years ago. We feel this is quite significant and could easily mark the end of the primary weekly uptrend. The long-term monthly chart below shows how the index has formed its first “lower high” of the past four years, nearly making a double top. The red, ascending line illustrates how overextended the index has become away from its lower channel support of the primary uptrend. At the very least, we expect the index to at least correct down to support of its uptrend line, although it could take several months to do so:
Like the Gold/Silver Mining Index, there is not an ETF that tracks the Home Construction Index. However, you may want to create a synthetic ETF by simultaneously shorting a small basket of individual stocks within the sector. Leading names to consider shorting are: KBH, TOL, PHM, RYL, BZH, DHI, and LEN. Subscribers to the MTG Real-Time Room already know we have been short both RYL and TOL for the past five days. Yesterday’s five percent drop in the $DJUSHB index put both of these positions firmly into the plus column since our entry five days ago.
Today’s watch list:
There are no new plays for today, as we expect the major indices to trade sideways and correct by time after the recent rally.
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:
-
SMH long (from Sept. 30) –
bought 30.26, sold 32.16, points = + 1.90, net P/L = + $561
Open Positions:
-
(none)
Notes:
We sold SMH into the opening gap yesterday, as it hit our original price target. We are now flat the ETFs.
Edited by Deron Wagner,
MTG Founder and
President