Commentary:
Despite three preceding days of distribution in the Nasdaq earlier in the week, the major indices leaped firmly higher in Friday’s session. Continued relative strength in large-cap stocks enabled the Dow to power ahead with a 1.2% gain. The S&P 500 and Nasdaq Composite followed with gains of 0.9% and 0.8% respectively. Shaking off its recent relative weakness, the small-cap Russell 2000 matched the Dow’s 1.2% advance. The S&P Midcap 400 was higher by 1.0%. All of the stock market’s gains were the result of an upside opening gap, as stocks subsequently trended lower before recovering later in the afternoon.
Higher volume in the NYSE confirmed last Friday’s gains, but the Nasdaq lacked the confirmation of better turnover. Total volume in the NYSE surged 18% above the previous day’s level. The Nasdaq volume, however, saw an increase of less than 1%. In the NYSE, volume finally rose above its 50-day average level. It had been nearly three weeks since turnover came in above average. Market internals were also strong for a change. Advancing volume in the NYSE exceeded declining volume by a margin of nearly 4 to 1. The Nasdaq ratio was positive by 5 to 2.
Last Friday’s strength caused the S&P to power ahead to another six-year high, while the Dow jumped to a fresh record high of nearly 13,000. Of the major stock market indexes, only the Nasdaq, a laggard since the recovery off the March lows, is still trading below its prior highs from February. The lesser known, though equally important, Russell 2000 is also stuck below its prior highs. As the chart below illustrates, the Nasdaq set a new closing high, but failed to penetrate resistance of its intraday high of February 22. Just a small rally today would do the trick:
Of all the industry sector ETFs we have discussed in recent days, the Semiconductor HOLDR (SMH) and Pharmaceutical HOLDR (PPH) may have the most bullish chart patterns. However, the difference is that SMH just broke out of a range, whereas we’ve been waiting for just a normal correction in PPH that would provide us with a good risk/reward for entry. As you can see, PPH has been on fire:
After closing higher in 13 of the last 14 days, one must conclude that PPH is due for a rest. Still, it has not yet shown any signs of lethargy. When it does, we plan to use the pullback as a chance to buy PPH with a positive risk/reward ratio. We’ll keep stalking it for a potential entry this week. We are also considering SMH, although last Friday’s action did not firmly confirm the recent breakout of its range.
On the downside, the Oil Service HOLDR (OIH) is one ETF that may be starting an intermediate-term correction. So far, OIH has only had a a short-term correction that has not been worth trading on the short side, but a break below its 20-day exponential moving average would probably lead to a more sustainable retracement off the highs. Notice how a break of the two-day low would also correlate to a break of the 20-day EMA:
In the April 20 issue of The Wagner Daily, we said, “If the S&P, Nasdaq, and Dow manage to blow off yesterday’s bearishness and finish the week at their highs, it would demonstrate just how much the bulls remain in control.” Obviously, that’s what occurred. Frankly, I don’t personally recall ever seeing the major indices rally so firmly after three consecutive days of distribution in the Nasdaq. Nevertheless, we will certainly respect the market’s resiliency! Last Friday was monthly options expiration day, but it was not the quarterly “triple witching” day. As such, it would be difficult to say that the day’s gains were purely the result of institutional manipulation of individual stocks to specific strike prices. The only thing clear is that very odd mixed signals are happening in the stock market right now! Whether or not a paradigm shift in underlying market sentiment is taking place remains to be seen, but the balance of power remains in the corner of the bulls.
Today’s Watchlist:
There are no new pre-market setups for today, but we will send an intraday e-mail alert if/when we enter anything new. On the long side, we are stalking both SMH and PPH for potential long entries. On the short side, we may enter OIH if it breaks below its 20-day EMA.
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:
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Open positions (coming into today):
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GLD long (500 shares total — 400 shares from March 28 & 100 shares from April 20) –
bought 66.62 (avg.), stop 66.89, target new high (will trail stop), unrealized points = + 2.08, unrealized P/L = + $1,040
IYR short (275 shares from March 13 entry) – sold short 85.75, stop 87.79, target 78.30, unrealized points = (1.32), unrealized P/L = ($363)
Closed positions (since last report):
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(none)
Current equity exposure ($100,000 max. buying power):
- $58,294
Notes:
Per intraday e-mail alert, we added to the winning GLD position last Friday. New average price is reflected above. Stop has been raised on full position as well.
Edited by Deron Wagner,
MTG Founder and
Head Trader