Returning to last week’s overall trend, stocks meandered in a directionless, sideways range throughout the day before finishing with mixed results and near the flat line. The benchmark S&P 500 Index was unchanged, the Nasdaq Composite advanced 0.2%, and the Dow Jones Industrial Average fell 0.3%. The small-cap Russell 2000 followed through on Monday’s breakout above the 200-day MA, adding another 0.9% yesterday. The S&P Midcap 400 rallied 0.5%. The S&P and Nasdaq both finished near their intraday highs, but relative weakness in the blue chips caused the Dow to finish in the bottom third of its intraday range.
Total volume in both the NYSE and Nasdaq rolled in 11% lighter than the previous day’s level. Yesterday’s turnover was among the lightest of all the sessions since September 17, the day preceding the Fed meeting in which interest rates were cut. Lighter volume during price consolidations near the highs are considered to be bullish because it shows sellers are not stepping in to unload shares into strength. Advancing volume in the Nasdaq exceeded declining volume by just under 2 to 1, while the NYSE ratio was positive by just a slight margin.
After an impressive one-month rally that took it to a new all-time high, the StreetTRACKS Gold Trust (GLD) has finally begun to correct. Yesterday, it gapped down just over 2%, but held support of its prior consolidation and the 20-day EMA. These two support levels are illustrated on the daily chart of GLD below:
Looking at the longer-term weekly chart, you will also see that GLD has pulled back to support of its prior high from May of 2006. If the recent breakout to new highs is to “stick,” this prior high must hold as support on the current retracement. The horizontal line on the weekly chart below marks this:
Being that yesterday was the first day of the GLD correction, it’s obviously too early to look for an entry point. However, we are providing an early heads-up so that you can add GLD to your watchlist and begin to look for an ideal entry point in the coming weeks. Specifically, we’ll be looking for the formation of a short-term hourly downtrend line to form off the October 1 high. After an area of horizontal price support is firmly established, we’ll be looking to buy the first breakout above the newly formed hourly downtrend line. This should also coincide with a reversal back above the 10-day MA. We’ll keep subscribers informed of any potential entry point we see develop in GLD.
Despite the recent strength in many tech sectors such as Internet, Networking, and Software, the Semiconductor Index ($SOX) has been a laggard within the Nasdaq. Normally, our relative strength system of trading means we buy leading industry sectors in the market, while avoiding or selling short the laggards. However, we have noticed bullish chart patterns developing in several large-cap semiconductor stocks over the past week. Intel, for example, is about ready to break out of a “cup and handle” pattern. If it does, the breakout will lead to a new 52-week high. Further, such a breakout would likely trigger the flow of institutional funds back into the overall sector. We’re stalking the Semiconductor HOLDR (SMH) for a potential long entry if it breaks out:
The dashed ascending trendline shows that SMH has slowly, but steadily been moving higher since setting its low in mid-August. We expect upside momentum to increase substantially if SMH breaks out above the high of its recent consolidation, marked by the horizontal line on the chart above. At that point, we’ll be looking for a long entry, especially if a simultaneous breakout in Intel confirms the move. Our price target would be a test of the prior high from July, while a protective stop would be placed below support of the 20-day EMA.
With the overall broad market, we remain in “SOH mode” (sitting on hands). However, a breakout in a specific industry sector ETF such as SMH carries lower risk, especially given the relative strength in tech right now.
Semiconductor HOLDR – SMH
Shares = 500
Trigger = 39.22 (above the high of consolidation)
Stop = 38.13 (below the 20-day EMA support)
Target = 41.35 (test of July 30 high)
Dividend Date = n/a (individual stocks pay dividends sporadically)
Notes = See commentary above for explanation of the setup. In the event of an opening gap up above the trigger price, remember to use the MTG Opening Gap Rules to adjust the potential entry price above the 20-minute high.
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):
LQD long (350 shares from August 31 entry) – (see notes below regarding dividend distributions)
bought 104.99 (avg.), stop 103.53, target 107.48, unrealized points + 0.21, unrealized P/L + $74
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
No changes to the open position above.
On September 4, LQD traded ex-dividend, with a dividend distribution of 49 cents per share. On October 1, LQD traded ex-dividend and paid out 48 cents per shares. Unrealized points and P/L figures include these distributions.
Edited by Deron Wagner,
MTG Founder and