The tug-of-war between the bulls and bears continued yesterday, as the main stock market indexes recovered Wednesday afternoon’s intraday losses and then some. After opening flat, stocks trended higher throughout the session. Opposite of the previous session’s late-day sell-off, the broad market surged higher in the final ninety minutes. The Nasdaq Composite gained 1.5%, the S&P 500 1.1%, and the Dow Jones Industrial Average 0.7%. The small-cap Russell 2000 and S&P Midcap 400 indices climbed 1.0% and 1.2% respectively. All the major indices closed at their best levels of the day.
Total volume in the NYSE was 3% lighter than the previous day’s level, while turnover in the Nasdaq rose 4%. The solid advance on higher volume enabled the Nasdaq Composite to score a bullish “accumulation day.” Unlike the previous day in which the Nasdaq gained just 0.1% on increasing volume, yesterday’s session was more indicative of institutional buying because the index surged substantially higher and finished at its intraday high. Trading in the NYSE was more subdued, but market internals were solid in both exchanges. Advancing volume in the NYSE exceeded declining volume by a ratio of 7 to 2. The Nasdaq adv/dec volume ratio was similarly positive by more than 4 to 1.
One big factor behind yesterday’s impressive reversal in the Nasdaq was strength in the Philadelphia Semiconductor Index ($SOX), which zoomed 2.1% yesterday. More importantly, the $SOX closed above resistance of its 200-day moving average for the first time since October 18, 2007, the same month the broad market entered into its current primary downtrend. The $SOX is a sector that saw a lot of activity in years past, but, until recently, the index had been stagnant for many months. In late April of this year, the index finally woke up and broke out above a four-month sideways range. Looking at the long-term weekly chart below, you’ll see that yesterday’s rally enabled the $SOX to break out above its primary downtrend line that had been in place since July of 2007. The dashed blue line illustrates the breakout (moving averages have been removed so you can more easily see the trendline):
Since the $SOX has gained approximately 25% off its March 2008 low without a significant correction, the reward/risk ratio of new long entries may not be very positive in the near-term. However, watch for the index to form a base of consolidation in the coming weeks. If the $SOX settles into a tight, sideways range for at least the next three to five weeks, it could become a leading sector in the months that follow. Since the Nasdaq is heavily weighted in semiconductor stocks, this could also have a bullish effect on the Nasdaq itself. If you haven’t already done so, it’s time to put the formerly sleepy $SOX back on your radar. To refresh your mind, ETF tickers correlated to the $SOX index are: SMH, IGW, PSI, USD, and XSD.
Yesterday, the crude oil commodity plunged nearly 3% at mid-day, but reversed to erase all its losses into the close. This enabled the Oil Service HOLDR (OIH) to break out above a multi-week base of consolidation to close at a fresh all-time high. Volume also rose to nearly twice its average daily level. The breakout in OIH is shown on the daily chart below:
If OIH holds above its breakout level of the $208 area, bullish momentum should carry it higher in the coming days. But since it’s getting a bit extended away from support of its 50-day MA, you might consider buying OIH with just a near-term time horizon, using tight trailing stops along the way. The U.S. Oil Fund (USO), which loosely follows the price of crude oil, may also break out to another new high. However, OIH showed a lot more relative strength than USO yesterday.
While on the subject of commodities, let’s discuss the StreetTRACKS Gold Trust (GLD). Although it’s been correcting since reaching its all-time high in March of this year, GLD may be ready to resume its long-term uptrend. Yesterday morning, GLD gapped higher out of the starting gates, then rallied above resistance of its 20-day EMA shortly thereafter. It backed off a bit later in the day, but closed only pennies below its 20-day EMA. If GLD follows through on yesterday’s 2.1% gain, it will break out above its intermediate-term downtrend line, which should lead to a resumption of the primary uptrend. The formation of a “higher low” a few days ago should provide the momentum for the breakout above the downtrend line. Its daily chart is shown below:
Per Intraday E-mail Alert to regular subscribers of The Wagner Daily, we already bought GLD when it moved above its 20-day EMA yesterday morning. Our protective stop is just below the May 13 low of $84.92. The iShares Silver Trust (SLV), which we unsuccessfully attempted to profit from two few weeks ago, is now showing relative weakness to GLD. As such, GLD is probably the better play of the two precious metals ETFs.
In yesterday morning’s commentary, we explained several technical reasons why the odds favored a broad-based move to the downside in the near-term. But we also cautioned that, “the stock market has not yet proven it has formed an intermediate-term top.” For that to occur, we said the S&P 500 and Dow Jones Industrial Average would at least need to fall below last week’s lows and their 20-day EMAs. Although technical analysis is an excellent way to increase the odds of being on the right side of the market, remember that “odds” are merely probabilities. Since we “trade what we see, not what we think,” we have no problem participating in the bullishness if it remains. The tricky part, however, is that recent market action has much more closely resembled a roller-coaster ride than the steady ascent of a Boeing 747. Considering the numerous levels of overhead resistance in this vicinity, the indecision is not surprising. Stay nimble out there, regardless of which side of the market you’re on!
There are no new setups in the pre-market today. As always, we’ll promptly send an Intraday Trade Alert if/when we enter anything new.
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):
UUP long (1,300 shares from April 25 entry) – bought 22.68 (avg.), stop 22.39, target 23.72, unrealized points = + 0.13, unrealized P/L = + $169
GLD long (250 shares from May 15 entry) – bought 87.33, stop 84.78, target 93.20, unrealized points = (0.33), unrealized P/L = ($83)
DXD long (350 shares from May 7 entry) – bought 50.79, stop 48.89, target 56.30, unrealized points = (0.74), unrealized P/L = ($259)
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
Per Intraday Trade Alert, we bought GLD yesterday morning. The SKF setup did not trigger and has been removed from today’s watchlist. No changes to the open positions.
Edited by Deron Wagner,
MTG Founder and