Commentary:
The major indices diverged sharply yesterday, as strength in techs lifted the Nasdaq to a solid gain, but all the other indices lagged behind. After shaking off initial weakness in the first hour of trading, the Nasdaq Composite trended steadily higher before finishing at with a 1.3% gain. The S&P 500 and Dow Jones Industrial Average showed substantial relative weakness, as both indices edged only 0.1% higher. Even the small and mid-cap stocks, which typically lead the Nasdaq on positive days, both had trouble getting in gear. The Russell 2000 advanced 0.3%, while the S&P Midcap 400 gained only 0.2%. Stocks closed only slightly off their highs, enabling the major indices to close in the upper third of their intraday ranges.
Total volume in the NYSE declined by 16%, while volume in the Nasdaq was 12% below the previous day’s level. The lower turnover prevented the Nasdaq from registering a bullish “accumulation day,” but it is positive that volume still came in above its 50-day average level. In the Nasdaq, advancing volume exceeded declining volume by a healthy margin of 3 to 1. However, the NYSE ratio was actually negative by 1.3 to 1.
Yesterday’s divergence in the stock market was rather interesting because the buying was primarily confined to tech-related sectors such as Semiconductors, Software, and Internets. One probable cause for the sudden strength was that the Semiconductor Index ($SOX) once again tested and bounced off support of its 200-day moving average. Several times throughout last month, we pointed out the close proximity of the $SOX to its 200-day MA, as the moving average is generally regarded as a sign of long-term strength or weakness in a stock or index. Amazingly, the 200-MA continues to provide rock solid support, enabling the $SOX to bounce every time it drifts back down to touch it. Since the beginning of December, the $SOX has touched support of its 200-MA on numerous occasions, but each time has led to a subsequent bounce. This is a great example of the power of the 200-day moving average:
Because the $SOX is so heavily weighted within the Nasdaq, it is bullish for the entire market that the index refuses to break below its 200-day MA. However, the problem is that every bullish reversal attempt over the past month has gone nowhere. On the last attempt, the 20-day MA acted as resistance that stalled out the rally attempt on December 18. Now, that day’s high has become a resistance level the $SOX needs to get above. But until that happens, there is no reason to get excited. Even if it does, the index still must contend with overhead supply all the way up to its high, around the 492 level. For that reason, we recommend that you have a short-term, momentum-driven time frame on any tech-related stocks or ETFs you may buy.
The Internet Index ($GIN) has a cleaner chart pattern than the choppy $SOX. On January 3, the $GIN dropped to test support of only its 50-day MA, as the index remains well above its 200-day MA. Since it was the index’s first test of the 50-day MA since the current uptrend began in July, the $GIN easily bounced off its support. One more strong day of buying could push the index back to test its 52-week high:
Of all the tech-related ETFs, the Software HOLDR (SWH) is perhaps the only one that is setting up for a potential buy entry on a breakout. For the past three months, SWH has been consolidating near its 52-week high in a relatively narrow, sideways range. The longer a base of consolidation, the more likely that a subsequent breakout will remain intact and move higher. For that reason, we plan to buy a small position of SWH if it breaks out above the range. Looking at the chart below, notice how it closed yesterday less than 25 cents below resistance of the high of its consolidation. The increasing volume is also a good sign:
Although the tech sectors showed encouraging signs of life yesterday, the lack of follow-through in the other industry sectors is concerning. Tech could single-handedly lead the Nasdaq higher for a while, but the stock market always trends more smoothly when rallies are broad-based. A lack of participation by other key sectors such as Financial and Retail increases the odds that strong tech stocks will fail their breakouts. Conversely, strength in tech makes it difficult to be short the weak sectors as well. Unfortunately, the divergence within the broad market increases the likelihood of the major indices staying stuck in choppy, sloppy sideways range for a longer period of time. As trend traders, choppy and erratic markets are not our friends. Until the market makes a decisive move out of the range, protect yourself by trading with reduced share size and a minimal number of positions.
Today’s Watchlist:
SWH – Software HOLDR
Long
Shares = 200
Trigger = 41.64 (above the high of the 3-month consolidation)
Stop = 40.22 (below yesterday’s low and the 20/50-day MA convergence)
Target = new high (will trail stop)
Dividend Date = n/a (based on individual underlying stock distributions)
Notes = See the commentary above for an explanation of this setup. Due to choppy market conditions, note that we have reduced our share size to assume a maximum capital risk of less than $300 (about half the normal risk).
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):
-
MZZ long (250 shares from Dec. 19 entry) – See important notes below regarding this position
bought 63.46, stop 60.14 (dividend adjusted), target 65.51 (dividend adjusted), unrealized points = (0.33), unrealized P/L = ($83)
SDS long (400 shares from Jan. 3 entry) – bought 58.90, stop 57.13, target 61.95, unrealized points = (0.72), unrealized P/L = ($288)
Closed positions (since last report):
-
(none)
Current equity exposure ($100,000 max. buying power):
- $38,744
Notes:
No changes to the open positions.
MZZ traded “ex-dividend” on December 20. As such, its price was adjusted lower to account for the dividend payment that was made to shareholders on December 27. The net result is no change in the overall profit or loss of the position, but stop and target prices had to be adjusted lower by the exact amount of the dividend distributions. The adjustment was $1.14 per share. Note that the “Unrealized points” and “unrealized P/L” figures already account for the dividend distributions that will be made.
Edited by Deron Wagner,
MTG Founder and
Head Trader