Yesterday was a day of divergence, as strength in tech stocks helped the Nasdaq score a decent gain, but the blue-chip Dow spun its wheels. Similar to the previous day’s action, the main stock market indexes moved higher throughout the first half of the day, then reversed course in the afternoon. The Nasdaq Composite, up 1.4% at its intraday high, finished with a 0.9% gain. On the other end of the spectrum, the Dow Jones Industrial Average lost 0.1%. The benchmark S&P 500 Index was unchanged. The small-cap Russell 2000 and S&P Midcap 400 indices advanced 0.6% and 0.3% respectively. The Nasdaq settled in the upper third of its intraday range, as the S&P and Dow closed in the bottom third of their ranges.
Total volume in the NYSE crept 1% above the previous day’s level, while volume in the Nasdaq declined 1%. In the Nasdaq, it’s positive that advancing volume beat declining volume by a margin of 3 to 1. However, the slightly lower turnover prevented the Nasdaq from registering a bullish “accumulation day” that would have indicated buying on the part of mutual funds, hedge funds, and other institutions. The adv/dec volume ratio in the NYSE was marginally negative.
Since the broad market began its intermediate-term correction in mid-May, the Philadelphia Semiconductor Index ($SOX) has shown more relative strength than most industry sectors. After rallying nearly 30% in just a two-month period from March through May, the $SOX began to correct alongside of the main stock market indexes in mid-May. However, while many of the major indices broke support of their two-month uptrend lines, as well as key moving averages, the $SOX correction was much more modest. Specifically, it perfectly held support of its 20-day exponential moving average, and never even came close to touching its 50-day MA.
Over the past week, the $SOX has settled into a tight band of consolidation, just above its 20-day EMA. Although the Nasdaq is still forming the right shoulder of a “head and shoulders” pattern, the $SOX Index should lead the broad market higher if the Nasdaq fails to follow-through to the downside. If the Nasdaq continues to show strength in the coming days, you might consider buying the Semiconductor HOLDR (SMH). Like the $SOX Index, SMH is poised to breakout above the high of a tight band of consolidation, while holding support of both its 20 and 200-day moving averages. The breakout level for buy entry is shown on the daily chart of SMH below:
Looking at the longer-term chart of SMH, we noticed that the low price of its short-term correction perfectly corresponded to support of the prior long-term downtrend line. The reversal off support of the prior downtrend line (the dashed blue line) is circled in pink on the weekly chart below (moving averages removed so you can more easily see the prior downtrend line):
The above chart is a great example of the most basic tenet of technical analysis; a prior resistance level will always become the new support level, after the resistance is broken (and vice versa). Because the previous downtrend line was in place for ten months before SMH broke out above it, the breakout above the downtrend line was quite significant. Likewise, the prior downtrend line acted as major support when SMH recently pulled back. If SMH breaks out above the high of its recent consolidation (over the $33 area), the successful test of its prior downtrend line should enable SMH to resume its newly established uptrend and make another leg up. Nevertheless, continued weakness and bearish divergence in the S&P 500 and Dow Jones Industrial Average could prevent SMH from easily moving higher if it breaks out.
One possible way to play SMH is to continue to take advantage of the weakness in the S&P and Dow with short positions in those indexes, but simultaneously buy a bit of SMH as well. If broad market weakness continues, SMH will probably drop at a slower rate, and fall a lesser percentage, than the S&P and Dow. If, however, Nasdaq strength continues to prevail, you can quickly cover any short positions in the S&P and Dow. Meanwhile, you SMH position will zoom higher. Buying sectors with relative strength, while selling short those with relative weakness, is a great way to reduce risk and smooth out your equity curve in choppy or indecisive markets. That’s pretty much the type of market we’re in right now.
Semiconductor HOLDR (SMH)
Shares = 500
Trigger = 33.12 (above the May 30 high)
Stop = 31.96 (below yesterday’s low and 200-day MA)
Target = 35.70 area (will trail stop based on price action)
Dividend Date = n/a (individual stocks pay dividends)
Notes = See commentary above for explanation of this setup.
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):
- No changes to the open positions above.
DXD long (350 shares – 175 entered May 29, 175 on June 2) – bought 52.98 (avg.), stop 51.72, target 57.85, unrealized points = + 1.75, unrealized P/L = + $613
DUG long (350 shares from June 3 entry) – bought 29.60, stop 27.48, target 33.85, unrealized points = + 0.67, unrealized P/L = + $235
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
Edited by Deron Wagner,
MTG Founder and