Commentary:
If the stock market’s feeble rally on the last day of the first quarter was not very convincing, the bullish action on the first day of the second quarter was about as impressive as it gets! The major indices leapt out of the starting gate, then cruised steadily higher throughout the rest of the session. The Dow Jones Industrial Average rallied 3.2%, the S&P 500 3.6%, and the Nasdaq Composite 3.7%. The small-cap Russell 2000 and S&P Midcap 400 scored identical gains of 3.3%. For the first time in weeks, all the main stock market indexes finished at their intraday highs.
Stocks scored rather impressive gains yesterday, and they did so on sharply higher volume as well. Total volume in the NYSE jumped 17%, while volume in the Nasdaq surged 26% above the previous day’s level. The strong gains on significantly higher volume enabled both the S&P and Nasdaq to register a bullish “accumulation day” that was indicative of institutional buying. Turnover in the NYSE moved back above its 50-day average level for the first time since March 20. However, trading in the Nasdaq remained below average for the seventh straight day. As one might have expected, market internals were extremely positive. In both the NYSE and Nasdaq, advancing volume steamrolled declining volume by a margin of 10 to 1.
Nor surprisingly, the Steel and Basic Materials ETFs we have been analyzing over the past few days broke out above their five-week downtrend lines yesterday. But after yesterday’s session, a mix of other sectors are beginning to show bullish patterns as well. Finding a bullish setup is no longer like searching for a contact lens dropped on a glass floor. Upon scanning hundreds of ETF chart patterns last night, the one group that caught our attention was the international ETFs, many of which are setting up for potential buy entries. One such example is the iShares Xinhua China 25 (FXI). Yesterday, it ripped through resistance of both its five-month downtrend line and 50-day MA. This is shown on the daily chart of FXI below:
Not only did FXI break out yesterday, but notice the subtle relative strength it has been showing for the past week. While the U.S. stock market indexes were drifting lower through the last week of March, FXI was modestly trending higher. This means it should pull back less than the domestic market when stocks take a breather, and should advance a greater percentage than the domestic indexes on the up days. We’re already long the iPath India Index (INP) and iShares Taiwan Index (EWT), but we’re now stalking FXI for a potential entry point as well.
Another international ETF looking good right now is the iShares Mexico (EWW). Already showing major relative strength to the domestic markets since the U.S. markets entered a primary downtrend last October, EWW rallied above two key levels of horizontal price resistance yesterday. EWW is now just 4.5% below its all-time high. Comparatively, the S&P 500 is still 12.5% off its high. EWW should therefore break out to a new record high if the domestic broad market maintains its strength for a weeks more:
If you wish to check out the chart patterns of the other international ETFs, a comprehensive list of them can be found on the free Morpheus ETF Roundup. Our sister publication, the weekly ETF Trend Tracker, also keeps you abreast on international ETFs with the most relative strength.
In addition to the international arena, a few domestic industry sectors broke out as well. The iShares Transportation (IYT), which we bought on March 25, raced 4.2% higher yesterday. It also closed at its highest level since October of 2007. The breakout is shown below:
Yesterday was the third time within the past month the major indices have gained more than 3% in a single day. The first two times were quickly met by selling pressure, but we think this time may be different for several reasons. First, the main stock market indexes each broke out above key intermediate-term resistance levels on their daily charts. Second, the rally was broad-based, not just led by a spike in the beaten-down financial sector. Third, quite a few individual stocks broke out or are about to break out of bullish consolidation patterns on the daily charts. Prior rallies in March were bounces off the lows in which there were very few tradeable patterns.
The breakouts above key intermediate-term resistance levels mentioned above were very similar among the S&P, Nasdaq, and Dow. Specifically, all three indexes moved above their prior highs from March 24/25. This enabled the second “higher high” to be formed since the uptrend began with the March 17 lows. More importantly, this also confirmed the breakout above their primary downtrend lines that have been in place for the past four months. Finally, all the broad-based indexes also zoomed back above their 50-day moving averages. The breakout above these key resistance levels is illustrated on the daily chart of the S&P 500 below. The chart patterns in the other major indices is very similar:
Over the past few weeks, we’ve been suggesting the possibility that the broad market’s rally off the mid-March lows could become the start of an intermediate-term uptrend, not just a near-term bounce off the lows. Based on the reasons above, we now believe a broad-based intermediate-term uptrend will indeed materialize. Although we expect continued strength for at least the next three to six weeks, don’t forget we’re still in a primary bear market. Take advantage of the strength while it lasts, but just remember the new intermediate-term uptrend is still within the context of a long-term, seven-month downtrend.
Today’s Watchlist:
iShares Xinhua China 25 (FXI)
Long
Shares = 125
Trigger = above 145.70 or below 143.20 (see notes below)
Stop = 138.30 (below support of 50-day MA and hourly uptrend line)
Target = 157.60
Dividend Date = n/a
Notes = Our entry into FXI is based on either a rally above yesterday’s high or a pullback to just above the 50-day MA, whichever comes first. If FXI neither drops below 143.20 nor rallies above 145.70 today, it will not yet have triggered. Note that FXI is quite volatile; hence the small share size to keep risk in line with the model account.
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):
-
IYT long (250 shares from March 25 entry) – bought 86.69, stop 85.89, target 92.30, unrealized points = + 2.33, unrealized P/L = + $583
INP long (200 shares from March 24 entry) – bought 66.26, stop 65.22, target 75.70, unrealized points = + 2.77, unrealized P/L = + $554
EWT long (700 shares from March 26 entry) – bought 16.60, stop 15.59, target new high (will trail stop), unrealized points = (0.28), unrealized P/L = ($196)
Closed positions (since last report):
-
(none)
Current equity exposure ($100,000 max. buying power):
- $47,485
Notes:
Although the market looked good from the open, we did not enter any new positions yesterday because we wanted to be sure the strength would remain throughout the day. Lately, strong morning sessions have had a habit of fizzling out in the afternoon. Nevertheless, we still had three open positions going into yesterday, each of which moved sharply higher. We’ll continue trailing stops higher on those positions in order to maximize gains and protect profits. We will also begin entering new long positions that have bullish chart patterns and positive risk/reward ratios.
Edited by Deron Wagner,
MTG Founder and
Head Trader