Just when it appeared the broad market may be ready to take a rest, the major indices once again powered higher, causing the S&P 500 to register its eighth consecutive day of gains and a new closing high not seen in nearly three years! Leadership was once again found in the S&P 500 and Dow Jones Industrial Average, which gained 1.6% and 1.8% respectively. Continued relative weakness in the Semiconductor Index, which only gained 0.6%, again caused the Nasdaq Composite to lag behind and only close 1.0% higher. But, although the Nasdaq has lagged the S&P and Dow during the past two days, the index has actually been showing the most relative strength during the past several weeks. Now we are simply seeing both the S&P and Dow playing “catch up” to the Nasdaq.
Volume in the NYSE increased by only 1%, but this was impressive considering volume has already been coming in well above average levels. The 1% increase was enough to enable the NYSE to have its highest day of volume since May 10, 2004. Total market volume in the Nasdaq declined by 7%, but still came in above its 50-day average. In fact, volume in the Nasdaq has come in above average levels for the past three weeks. Given that the major indices have been in a sharp uptrend during the past two weeks, the higher than average volume levels are bullish.
Although the S&P 500 Index broke resistance of its weekly downtrend line only a few days ago, it has already rocketed to a new multi-year closing high! Yesterday’s closing price of 1,161.60 surpassed the prior 52-week high of 1,157.76, which was set on February 11, 2004. The intraday high of March 5, 2004 actually exceeded yesterday’s closing price in the S&P, but the index closed the day just below 1,157. Therefore, you have to go all the way back to March of 2002 in order to find a higher closing price on the S&P 500 Index. The weekly chart of the S&P 500 below illustrates how the index closed at a new 52-week high after breaking its downtrend line only one week prior:
The Nasdaq Composite was formerly leading the S&P 500 and Dow Jones Industrials during the recovery off the August low, but now the weekly chart shows the index is still well below its prior high from earlier in the year. Like the S&P, the Nasdaq broke above its weekly downtrend line last week, but now has resistance of its July, 2004 high at the 2,055 area. Take a look:
Because each of the major indices are so far extended away from support of their 20-day moving averages, we cannot recommend entering new positions in the broad-based ETFs (such as SPY or QQQ) right now. However, there are probably more opportunities by looking at individual sector ETFs and taking advantage of institutional sector rotation. Biotechs (BBH), for example, is now starting to show signs of life and could be poised to make a move higher and catch up with recent strength in the broad market. The same goes for the Pharmaceuticals (PPH). Conversely, sectors such as Oil Service (OIH) are now beginning to show signs of money outflow, which means you could short these ETFs. If you can identify the sectors where institutional money is rotating, you can simply follow along and ride on the coat tails, through the use of the sector ETFs (see the MTG Position Sizing Model for a list of ETFs we commonly follow).
If you missed the sharp rally of the past two days, don’t feel bad about it. All of Wednesday’s gains were the result of an overnight gap, which means you had to have overnight positions in order to profit from it. Given the weakness the market showed Tuesday afternoon and the uncertainty of the election at that time, it would have been a bit of a gamble to be aggressively long. As for yesterday’s gains, we expected more of a sideways consolidation in order to allow the market to catch its breath, but it wasn’t to be. Sometimes we will miss big moves that happen very rapidly, but we don’t care about that. Our goal is not, and has never been, to catch the bottom of every uptrend, nor short the top of every downtrend. The reason for MTG’s long-term profitability has always been a focus on making consistent, low-risk profits in all market conditions, not just waiting for the big trends to come along every now and then.
Today’s watch list:
PPH – Pharmaceutical HOLDR
Trigger = above 70.59
(above yesterday’s high)
Target = 72.90 (resistance of the prior high from October)
Stop = 69.35 (below yesterday afternoon’s consolidation)
Notes = This setup did not trigger yesterday, but we still like it for possible entry today. Note we are not bullish on this index because it is in a downtrend, but are simply looking to play a bounce on the long side. Remember to follow the price of $IPH, which is the index that tracks PPH. It will give you a more accurate idea of the fair value of PPH.
We are also considering buying BBH, which we feel is in the midst of reversing. However, we are hesitant to call it as an “official” trade setup due to overhead resistance of its 200-day moving average. Advanced traders may want to take a look at BBH.
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.
PPH never hit its trigger price yesterday, so we are flat. However, we are again looking for an entry in PPH today.
Edited by Deron Wagner,
MTG Founder and