The broad market wrapped up an already impressive week with another day of gains last Friday, which enabled each of the three major indices to close more than 3% higher for the week. The Nasdaq Composite led the way higher, posting a 0.8% gain, while the S&P 500 and Dow Jones Industrial Average gained 0.4% and 0.7% respectively. Despite a lack of participation in the Semiconductor Index, the Nasdaq managed to close higher every day last week, gaining 3.2% in the process. Volume in the Nasdaq increased by 4% over the previous day’s level, which means that last Friday was another bullish “accumulation day,” the third such day in the past five sessions. Like the Nasdaq, the S&P 500 also gained 3.2% last week, but its winning streak now stands at nine consecutive days of gains! The Dow’s 3.6% weekly gain was its largest since March of 2003. Total market volume in the NYSE declined by 3% on Friday, but still came in near its highest levels of the past six months.
When the broad market is in a strong uptrend, the Nasdaq usually leads both the S&P 500 and Dow Jones in terms of percentage gain. However, this was not the case last week because relative weakness in the heavily-weighted Semiconductor Index ($SOX) kept the Nasdaq momentum in check. The $SOX gapped firmly above resistance last Wednesday, but the breakout failed and the index quickly fell back into its prior range of consolidation later that day. A look at the weekly chart of the $SOX explains why the opening gap up failed to remain intact last Wednesday:
As you can see, last week’s high in the $SOX, which was set on Wednesday, corresponded with resistance of its weekly downtrend line. This downtrend line has been in place since the high of January 2004, so it’s not surprising that the index had some difficulty rallying above it. When resistance of a weekly trend line is tested, it usually takes several attempts before the index is able to push through it. Two good examples of this are the S&P 500 and Nasdaq Composite indexes, both of which attempted to rally through resistance of their weekly downtrend lines at the beginning of last month. However, the first breakout attempts failed and it took three more weeks until both indices were able to rally and hold above their weekly downtrend lines, which occurred last week. Any rally in the Nasdaq is historically short-lived if the $SOX is not leading the way, so keep a close eye on how the semis behaves in the upcoming week. A breakout above the weekly downtrend line of the $SOX is necessary in order to confirm the broad market’s recent gains.
Long time readers of this newsletter know that I have been bullish on the price of gold and silver for nearly two years. So, I was quite pleased when Spot Gold, which closed last week just over $434 per ounce, set a new 16-year high. Curiously, it is unusual to see new highs in defensive commodities like Gold when the equities market is surging to new highs, but the weak U.S. dollar is a big factor. The new high in the price of spot gold also corresponded with a new low for the dollar, which closed at only 71 cents to the Euro last week. It sure is becoming expensive to travel abroad these days!
During the past year, we have alerted you to each of the major pullbacks in the Gold Mining Index ($GOX), which we felt presented low-risk buying opportunities in the sector. Because there is not yet an ETF that tracks Gold (but GLD is scheduled for launch in January), our hedge fund has been creating our own “synthetic ETF” by trading a basket of individual stocks within the gold/silver mining sector. If you have done the same during the past several months, you should be quite pleased with your profits. On the chart of Spot Gold below, notice the new 16-year high (although only 10 years are shown). This chart is compliments of Kitco.com, which is where I have personally bought my gold and silver bullion over the past eighteen months (although MTG is not affiliated with Kitco in any way):
With nine consecutive days of gains in the S&P 500 and five consecutive days in the Nasdaq, you don’t need me to tell you it’s a bit risky to initiate new positions in the broad-based ETFs such as SPY, QQQ, or DIA. Just as indices never go straight down without bouncing along the way, they also cannot sustain parabolic moves for an extended period of time without first correcting. If you’re already long the broad-based ETFs, good work! But, consider using tight stops below Friday’s lows in order to protect any profits. If you are not already long any broad-based ETFs, we do not recommend shorting at this level because the break above the weekly downtrend lines is likely to result in institutional buying on the pullbacks, as opposed to selling into strength. There are, however, a few opportunities in individual industry sectors, which is what we are attempting to participate in by stalking both PPH and SMH for new trade entry today. Following sector rotation reduces your overall risk and increases your profits.
Today’s watch list:
SMH – Semiconductor HOLDR
Trigger = above 33.10
(above last Friday’s close)
Target = 35.55 (resistance of the 200-day MA)
Stop = 32.20 (below last Friday’s low)
Notes = Although the $SOX has not yet broken its weekly downtrend line, SMH has already done so. This is because the components that comprise SMH are different than the weightings of the $SOX. Regardless, we think SMH presents a good risk/reward at current levels, and a breakout in the $SOX would only serve to make the setup better.
PPH – Pharmaceutical HOLDR
Trigger = above 70.45
(above last Friday’s high)
Target = 72.90 (resistance of the prior high from October)
Stop = 69.35 (below last Friday’s low)
Notes = This setup has been on our watchlist for the past two days, but it still has not yet triggered. But, since we still like the play, we’re going to stalk it for entry one more day. 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.
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 on Friday, so we are flat. However, we are again looking for an entry in PPH today, as well as SMH.
Edited by Deron Wagner,
MTG Founder and