Strength in the tech stocks helped the Nasdaq to break out to finish at its highest level since February 2001, but the S&P and Dow lagged behind. A 1.6% gain in the Semiconductor Index ($SOX) enabled the Nasdaq Composite to close 0.7% higher. The S&P 500 advanced 0.3%, while both the Dow Jones Industrial Average and S&P Midcap 400 indices gained 0.2%. The small-cap Russell 2000 rallied 0.4%. The S&P and Dow both closed near the middle of their intraday ranges, but the Nasdaq wrapped up the session near its high.
Total volume in the Nasdaq increased by 3% over the previous day’s level, enabling the index to register a bullish “accumulation day.” Turnover in the NYSE was unchanged. Although it’s positive that the Nasdaq gained on higher volume, the increase was not enough to push volume back above its 50-day average level. This tells us that yesterday’s gain was more the result of an absence of selling as opposed to a large presence of institutional buying. In the Nasdaq, advancing volume exceeded declining volume by a healthy margin of 2.3 to 1, but the ratio in the NYSE was positive by only 1.3 to 1.
In yesterday’s newsletter, we illustrated the “head and shoulders” pattern that was setting up on the hourly charts of both the Nasdaq Composite and Nasdaq 100 indices. But the right shoulders never fully materialized and both Nasdaq indices instead rallied above the top of their “heads,” thereby invalidating the chart pattern. As such, all bets are off on a short-term downward move in either Nasdaq index. The S&P 500, however, still remains below its prior high of 1,389. As you can see on the daily chart below, the index has attempted to break out on several occasions over the past week, but has been unable to do so. With both the 20-day moving average and the lower channel of its primary uptrend line quickly closing in, we should see a decisive move out of the range, one way or the other, within the next day or two:
Though the major indices have been grinding higher lately, they have been doing so in a choppy and indecisive manner that has lacked momentum. It’s the kind of market that makes it challenging for trend-traders who thrive on market momentum. One of the reasons for the chop has been the range-bound performance of the $SOX index. Over the past two months, the $SOX has been oscillating in a horizontal range of seven percent. The good news is that the moving averages have converging in such a way that should soon force resolution out of the range. Just below yesterday’s low, the 20 and 50-day moving averages have converged at the 455 level. Overhead resistance of the 200-day moving average is right over yesterday’s high, but the $SOX has stalled just shy of its 200-day MA on several occasions over the past month. Still, the longer it consolidates just below the resistance, the more likely it will eventually break out above the range. Keep a watchful eye on the $SOX in the coming days, as it always acts as a reliable leading indicator for the direction of the Nasdaq and the whole broad market:
In the event the S&P 500 begins to roll over by falling below its uptrend line, look for the Retail Index ($RLX) to be among the weakest sectors. To illustrate the recent relative weakness in Retail, take a look at the daily chart of the Retail HOLDR (RTH):
RTH was looking good until November 1, when it broke support of its tight consolidation and fell below its primary uptrend line. Two days later, RTH closed below its 50-day moving average. Over the past week, it has attempted to rally back above its 50-day MA, but it has lacked the momentum to do so. This relative weakness to the broad market tells us that RTH is a good short sale candidate if the S&P fails to break out to a new high.
Conversely, the iShares Xinhua China 25 Fund (FXI) has been one of the strongest ETFs of the past week.
Tracking mainland China’s equivalent of the Dow Jones, FXI has been completely ignoring the sideways action in the S&P by rallying steadily higher. Yesterday, it closed at a fresh all-time high for the third consecutive day. It’s pretty far away from its 20-day moving average right now, so buying at current levels may not carry a positive risk/reward ratio. However, we definitely like the idea of buying it on a pullback to support of its uptrend line. If the broad market continues higher from here, we may not see a decent correction in FXI for a while, but a solid pullback in the S&P should lead to a low-risk entry point in FXI.
There are no new trade setups in the pre-market today. We are stalking a few ETFs for potential entry, but first want to asses market conditions with the S&P at this key juncture.
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):
GLD long (300 shares total – 200 from Oct. 25 & 30 entries, 100 added on Nov. 8) –
bought 59.84 (avg.), stop 60.65, target 64.45, unrealized points = + 2.35, unrealized P/L = + $705
DBC long (700 shares from November 6 entry) –
bought 24.87 (avg.), stop 24.35, target 26.59, unrealized points = (0.29), unrealized P/L = ($203)
ICF short (250 shares from November 7 entry) –
sold short 94.23, stop 96.78, target 89.45, unrealized points = (0.96), unrealized P/L = ($240)
USO long (400 shares from November 8 entry) –
bought 53.31, stop 52.07, target 57.85, unrealized points = (0.96), unrealized P/L = ($384)
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
No changes to our open positions.
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Click here to view MTG’s past performance results (updated monthly).
Edited by Deron Wagner,
MTG Founder and