Stocks kicked off the week on a rather positive note, as the main stock market indexes built on the gains of last week’s bullish reversal. The broad market gapped higher on the open, oscillated in a sideways range throughout the first half of the day, then powered higher late in the afternoon. Logging large gains, all the major indices closed near their highs of the previous day. The S&P 500 motored 4.8% higher, the Dow Jones Industrial Average climbed 4.7%, and the Nasdaq Composite rallied 3.4%. The small-cap Russell 2000 and S&P Midcap 400 indices gained 3.9% and 4.4% respectively. For the second time within the past three sessions, stocks closed at their best levels of the day, hinting at institutional support.
The only negative of yesterday’s session is that volume trailed off in both exchanges. Total volume in the NYSE was 26% below the previous day’s level, while volume in the Nasdaq receded 25%. Turnover also fell below 50-day average levels for the first time in thirteen days. Higher volume would have been better, as it would have confirmed the punch of accumulation by mutual funds, hedge funds, and other institutions. Nevertheless, the price to volume relationship of the market has been fine since the bullish reversal day of October 16. That day, sharply higher volume matched solid gains in the market. Stocks pulled back the following day, but on lighter volume. Despite yesterday’s lower turnover, market internals were firmly bullish. In the NYSE, advancing volume exceeded declining volume by a margin of 7 to 1. The Nasdaq adv/dec volume ratio was positive by nearly 6 to 1.
Since the market first began showing signs of strength last week, we’ve been saying our plan is to look for the first sector ETFs that show bullish divergence and relative strength to the broad market. From October 13 – 16, there was only minimal signs of relative strength, as most sectors were still moving in lockstep with the main stock market indexes. Yesterday, however, we finally began to see bullish divergence among a few sectors.
If you’ve read my new book, Trading ETFs: Gaining An Edge With Technical Analysis, you already know my preferred way of spotting early-stage relative strength is by overlaying charts of the various industry sectors with charts of the S&P 500 and/or Nasdaq Composite. But in the current technical state of the market, there’s an even easier way to determine which sectors are positioned to outperform the broad market in the near-term. Since the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average all closed within a few points of their October 17 intraday highs, spotting short-term relative strength is as simple as identifying ETFs that have already closed above their October 17 highs. Conversely, ETFs that finished yesterday well below their October 17 highs are showing short-term bearish divergence, and are worthy of consideration on the short side IF the broad market suddenly starts heading lower again.
Less than one hour after yesterday’s open, we noticed two sectors that were already testing their October 17 highs, while the S&P 500 was still trading near the middle of the previous day’s range. As such, we sent two real-time Intraday Trade Alerts to subscribers, informing them we were buying both S&P Metals & Mining SPDR (XME) and Ultra Oil & Gas ProShares (DIG), based on their relative strength, as well as anticipation the broad market would continue higher in the short-term. When the main stock market indexes subsequently zoomed higher in the afternoon, XME, and especially DIG, showed the relative strength we expected. Both ETFs closed above their October 17 highs, as volume also rose above average levels. To illustrate our reason for buying DIG, compare the two 15-minute intraday charts below. The first is a chart of DIG, while the second is a chart of the S&P 500 SPDR (SPY). Moving averages have been removed so you can more easily see the price divergence:
In hindsight, it’s easy to look back and see that DIG closed above the previous day’s high and is now acting strong. However, the educational point with the charts above is that observant traders could have easily spotted the relative strength of DIG much earlier in the day, before it broke out above the short-term range. THIS is a clear example of the power of relative strength trading. The bottom line — Stocks and ETFs that hold firm near their highs, when the broad market is drifting in a sideways range, are usually the first to surge to new highs when the overall market moves higher. Further, stocks and ETFs with relative strength are usually the last to fall if the broad market heads turns tail and heads south.
Of the more than 300 ETFs we follow on the Morpheus ETF Roundup, DIG was the top percentage gainer yesterday. Because it’s leveraged to move at double the percentage of the underlying index, DIG shot 22% higher yesterday, and is already showing a gain of more than 3 points since our entry. To assist you in your research, here’s a list of some other sector ETFs that started showing relative strength by closing above their October 17 highs yesterday. In descending order, based on yesterday’s percentage gains, the list includes: Ultra Oil & Gas ProShares (DIG) – 22% gain, Ultra Basic Materials ProShares (UYM) – 19% gain, S&P Metals & Mining SPDR (XME) – 14% gain, Oil Service HOLDR (OIH) – 12% gain, FirstTrust Natural Gas Index (FCG) – 12% gain, and Market Vectors Steel (SLX) – 11% gain. In addition, keep an eye on Market Vectors Gold Miners (GDX), which closed right at the previous day’s high, but rallied more than 11%.
Overall, it looks as though the Energy and Basic Materials sectors have the strongest short-term chart patterns right now. As such, consider buying any of the above ETFs on a pullback to support of their 20-period exponential moving averages (EMAs) on their hourly charts. More aggressive traders, as well as daytraders, can look for the same pullback on the 15-minute charts instead.
As for the broad market outlook, all the major indices managed to close firmly above their 10-day moving averages yesterday — for the first time this month. In yesterday’s Wagner Daily, we said the 10-day moving averages would be an important test of short-term resistance, and the market responded quite favorably. We’re slightly concerned by yesterday’s low volume levels, but price action itself was very positive. There were a few ETFs that showed relative weakness, but we won’t focus on short selling until the major indices start exhibiting signs of weakness again. We’ll soon know if this rally has legs, based on how the main stock market indexes react on the test of their “swing highs” from October 14. For most of the broad-based indexes, this roughly correlates to resistance of the 20-day EMAs, the next key area of price resistance to monitor.
Yesterday, we entered two new ETF positions, but both were done via Intraday Trade Alert. Until the current rally becomes more established, we’re more comfortable entering positions in this manner, rather than listing them in the pre-market. As always, we’ll promptly send an Intraday Trade Alert if/when we enter anything new. ETFs on our watchlist for potential entry include: Biotech HOLDR (BBH), iShares Nasdaq Biotech (IBB), CurrencyShares Japanese Yen (FXY; possible re-entry), and Market Vectors Gold Miners (GDX).
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. Please review the Wagner Daily Subscriber Guide for important, automatic rules on trigger and stop prices.
Open positions (coming into today):
- Per Intraday Trade Alerts, we bought both DIG and XME yesterday. Trade details listed above.
- Our price targets in both DIG and XME are approximate guidelines, as they correlate to a test of the 20-day moving averages. However, we will closely monitor market conditions, as well as the performance of these ETFs. If conditions suddenly deteriorate again, we will probably make a decision to just lock in any available gains at the time. If any changes are made to the stops or targets above, we will, of course, send an Intraday Trade Alert with details of the changes. If no further alerts are received regarding DIG or XME, assume we’re continuing to honor the same stops and targets listed above.
- Reminder to subscribers – Intraday Trade Alerts to your e-mail and/or mobile phone are normally only sent to indicate a CHANGE to the pre-market plan that is detailed in each morning’s Wagner Daily. We sometimes send a courtesy alert just to confirm action that was already detailed in the pre-market newsletter, but this is not always the case. If no alert is received to the contrary, one should always assume we’re honoring all stops and trigger prices listed in each morning’s Wagner Daily. But whenever CHANGES to the pre-market stops or trigger prices are necessary, alerts are sent on an AS-NEEDED basis. Just a reminder of the purpose of Intraday Trade Alerts.
DIG long (150 shares from October 20 entry) –
bought 33.60, stop 29.60, target 45.48, unrealized points = + 3.23, unrealized P/L = + $485
XME long (200 shares from October 20 entry) –
bought 33.49, stop 29.88, target 40.33, unrealized points = + 0.75, unrealized P/L = + $150
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
Edited by Deron Wagner,
MTG Founder and