Commentary:
Stocks concluded last Friday’s session with moderate gains, but the day’s action was uneventful overall. The major indices gapped higher on the open, chopped around in a range throughout the day, then settled in the upper third of their intraday ranges. The Nasdaq Composite gained 0.7%, while both the S&P 500 and Dow Jones Industrial Average advanced 0.5%. Bearish divergence was seen in small and mid-caps. The Russell 2000 lost 0.3% and the S&P Midcap 400 slipped 0.2%. For the week, the S&P 500 edged 0.3% higher, but is still 6.6% off its October high. For the year, the benchmark index is showing a gain of 2.8%.
Total volume edged 1% higher in the Nasdaq, as volume in the NYSE increased 9% over the previous day’s level. Given the bearish sentiment in the market, a day of higher volume gains would normally have been a positive sign of institutional accumulation. However, the modest increase in turnover was likely attributed to last Friday being an options expiration day. Trading activity typically rises on the third Friday of every month, as investors jockey their stock positions ahead of monthly options expiration. Market internals also failed to confirm the gains in the main stock market indexes. Advancing volume in the Nasdaq exceeded declining volume by less than 3 to 2. The NYSE adv/dec volume ratio was slightly negative.
Last week, the spot gold commodity finally retraced a bit of its parabolic run, causing the StreetTRACKS Gold Trust (GLD) to correspondingly do the same. In each of the past two sessions, GLD has closed below its 20-day EMA, but the ETF is still several points above its 50-day MA. From here, we’re waiting to see whether GLD pulls back more and touches its 50-day MA, or if perhaps it moves back above its newly formed hourly downtrend line. Similarly, the Market Vectors Gold Miners (GDX), which is tied to the price of a basket of individual gold mining stocks, has already retraced to its 50-day MA, but has held above it in each of the past two sessions. As with GLD, we want to see whether or not GDX intends to continue its strong uptrend. If it does, we will consider buying it on a rally above the downtrend line shown on the daily chart below:
For better price confirmation, one might consider waiting for a move back above the 20-day EMA, presently at 48.33, before buying GDX. This would help to confirm a real resumption of the uptrend and reduce the odds of merely getting sucked in by a “stop hunt” above the downtrend line. Although not shown, the pattern in GLD is similar to GDX, except that GLD remains several points above its 50-day MA. Before the correction off the highs, GLD was showing slight relative strength to GDX, but the opposite has been happening over the past several days.
One of best things about commodities ETFs such as GLD is that they are not directly correlated to the direction of the overall stock market. The uncorrelated chart patterns of specialty ETFs such as commodities, bonds, currencies, and even international ETFs make them the ideal trading vehicles in periods of indecision for the U.S. stock market. The CurrencyShares Euro Trust (FXE), which mirrors the spread of the Euro to the U.S. dollar, is another great example of an ETF that ignores the direction of the broad stock market. FXE is presently consolidating in a tight range, at its all-time high, possibly setting up for another leg higher. However, be aware that the weekly chart is getting a bit extended to the upside.
Outside of the specialty ETFs arena, we still like the relatively bullish patterns in the Biotech and Utilities sectors. Both sectors closed marginally higher last Friday, but have not yet triggered for the long entries we illustrated in last Friday’s Wagner Daily. With either the DJ Utilities Average ($DJU) or the Amex Biotech Index ($BTK), a firm rally above last Friday’s highs could trigger potential long entries in the corresponding ETFs with the most relative strength. Subscribers should note the trade details for our long setup in the iShares DJ Utilities Sector (IDU) below. On the short side, we still like the Oil Service Index ($OSX), which broke down firmly below its 50-day MA last week. We remain positioned long in the inversely correlated UltraShort Oil and Gas ProShares (DUG).
Last Friday’s price action in the S&P 500 left the index “stuck between a rock and a hard place.” With the intraday trading range contained within the prior day’s range, it positions the S&P for further indecision going into today’s session. On one hand, the S&P held the low of the November 13 rally, meaning the index could still be reversing to the upside. Conversely, however, the S&P has retraced nearly all of that day’s gain and could be ready to resume its current downtrend to new lows. With the 200-day MA acting firmly as overhead resistance, odds would favor the second scenario, but we can’t be too bearish on the short-term unless the S&P convincingly breaks down below last week’s low. Approach the next several days with caution because we are also dealing with a holiday-shortened week. Expect volume to gradually dwindle leading up to the market’s closure on Thursday for the Thanksgiving Day holiday. Friday is a shortened session that will close at 1:00 pm ET.
Today’s Watchlist:
IDU – iShares DJ Utilities Sector
Long
Shares = 300
Trigger = 101.09 (above last Friday’s high and downtrend line)
Stop = 99.21 (below last Friday’s low)
Target = new high (will trail stop)
Dividend Date = mid-December of 2007
Notes = We are looking to buy a resumption of the primary uptrend, confirmed by a breakout above the hourly downtrend line. FYI, note that the S&P Select Utilities SPDR (XLU) is a lower-priced Utilities ETF with a similar chart pattern.
In addition to IDU, we are also stalking GLD and/or GDX for potential long entry if they resume their uptrends. We will send an intraday e-mail alert if we buy either of them within the next several days.
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):
-
DUG long (250 shares from November 12 entry) – bought 42.43 (avg.), stop 40.88, target 50.30, unrealized points + 1.27, unrealized P/L + $318
XME short (300 shares from November 13 entry) – sold short 62.60, stop 65.23, target 56.20, unrealized points + 0.08, unrealized P/L + $24
Closed positions (since last report):
-
(none)
Current equity exposure ($100,000 max. buying power):
- $29,681
Notes:
No changes to our open positions.
Edited by Deron Wagner,
MTG Founder and
Head Trader