The major indices scored their strongest gains in weeks yesterday, as stocks trended steadily upwards throughout the entire session and finished at their intraday highs. Continued strength in the Semiconductor Index ($SOX), which rallied 3.8%, helped the Nasdaq to post a 2.0% gain. Both the S&P 500 and Dow Jones Industrial Average turned in solid performances as well, gaining 1.0% and 0.9% respectively. Even the small and mid-cap arenas that have been lagging in recent days suddenly woke up. The Russell 2000 advanced 2.4%, while the S&P Midcap 400 closed 1.7% higher.
Turnover picked up across the board, enabling the Nasdaq to register its second consecutive “accumulation day.” Total volume in the Nasdaq was 19% higher than the previous day’s level, while volume in the NYSE increased by 8%. This time, the higher volume gains in the S&P pointed to institutional buying in the NYSE in addition to the Nasdaq. Volume in both exchanges was well above average levels, and was the highest in approximately one month. Volume also was higher than it was on both “distribution days” that occurred on September 6 and 7. Clearly, the buying power of mutual funds, hedge funds, and other institutional traders were behind yesterday’s broad-based rally.
In addition to the strength in techs that we have noted over the past several days, institutional money has also begun to rotate into a few other sectors that have been dormant for a long time. The DJ U.S. Home Construction Index ($DJUSHB), for example, has been in a steady downtrend the entire year, but it rocketed 6% higher yesterday. The first sign of stabilization in the index occurred when it formed a slightly “higher low” on August 14. After a small bounce, the $DJUSHB sold off to test support of that August 14 low on September 7. It formed a “double bottom” at that point, which helped the index to break out firmly above a four-week base of consolidation and its 50-day moving average yesterday. There is still a substantial area of resistance that is marked by the red dashed horizontal line on the chart below, but we feel there is a good chance that yesterday’s momentum will carry the index above that level within a few days:
As indicated on the Morpheus ETF Roundup are two different ETF families that are correlated to the Home Construction sector. They are the iShares DJ U.S. Home Construction (ITB) and the StreetTRACKS Homebuilders (XHB). The former moves pretty much in lockstep with the $DJUSHB index, while the latter is weighted differently. But of the two, XHB is more popular because it trades an average daily volume of 1 million shares versus 100,000 shares for ITB.
Yesterday’s gain in the Nasdaq was impressive because it enabled the index to erase all of its losses from the September 6 and 7 “distribution days.” As mentioned earlier, it also did so on higher volume than both of those sessions. Looking at the chart below, you will see that the Nasdaq closed above is prior high from September 5, but the 200-day moving average now looms overhead. It’s anyone’s guess as to how easily the index will overcome its 200-day MA, assuming it even does, but this pivotal resistance level provides a good reason to be cautious with new trade entries in this vicinity:
As we have been mentioning all along, the S&P 500 has much less overhead resistance than the Nasdaq and is only one percent off its multi-year high. Obviously, a breakout to a new 52-week high would be extremely bullish for the S&P 500, but resistance of a prior high also provides a good excuse for traders to sell into strength. Because of the key resistance areas that both the S&P and Nasdaq are approaching, don’t become complacent! Yesterday’s session definitely showed a lot of bullish momentum, but just remember that none of the indices are at their 52-week highs and therefore still must contend with varying degrees of overhead supply.
XHB – StreetTRACKS Homebuilders
Trigger = pullback to 32.60
Target = 37.60 (50% Fibo retracement from the April high to July low)
Stop = 30.71 (below 20/50 day MA convergence)
Shares = 350
Notes = Per the above commentary on strength in the Home Construction sector, we are looking to trade momentum that should carry XHB higher over the next one to two weeks. Note that the trigger for entry is on a price retracement, rather than buying a breakout above the high. However, if XHB consolidates at the high and does not retrace to our trigger price, we will probably send an intraday e-mail alert informing of a new trigger price above yesterday’s high instead.
Daily Performance Report:
Below is an overview of all open positions, as well as a performance report on all positions that were closed only since the previous day’s newsletter. Net P/L figures are based on the $50,000 Wagner Daily model account size. Changes to open positions since the previous report are listed in red text below:
Open positions (coming into today):
XLU short (1,000 shares from September 5 entry) –
sold short 34.47, stop 35.18, target 33.20, unrealized points = + 0.42, unrealized P/L = + $420
IWM short (400 shares from September 12 entry) –
sold short 71.41, stop 73.12, target 67.10, unrealized points = (0.73), unrealized P/L = ($292)
Closed positions (since last report):
IYR short (400 shares from August 23 entry) –
sold short 74.52, covered 76.79, points = (2.27), net P/L = ($916)
Current equity exposure ($100,000 max. buying power):
Per intraday e-mail alert, we sold short IWM. The reason for the entry was the formation of the right shoulder of a head and shoulder pattern that was occurring INTO resistance of the 200-day moving average. Obviously, IWM subsequently closed above its 200-day MA when the broad-based rally continued in the afternoon, but the trade presents a very positive risk/reward nevertheless. IYR finally stopped us out, but the XLU short continues to act well and is showing nice relative weakness.
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Click here to view MTG’s past performance results (updated monthly).
Edited by Deron Wagner,
MTG Founder and