The broad market gapped significantly
higher last Friday morning, but subsequently drifted lower throughout the day
before finishing with mixed results. At the open, the Nasdaq
Composite was trading 0.7% higher, but it closed with a gain of only 0.1%. Both
the S&P 500 and Dow Jones Industrial Average also fell from their highs, but
advanced 0.1% and 0.2% respectively. Small and mid-caps showed relative
weakness. The Russell 2000 Index lost 0.2% and the S&P Midcap 400 closed 0.3%
lower. With the exception of the Dow, each of the major indices finished near
their intraday lows. The Dow closed just below the middle of its range.
Turnover spiked substantially in Friday's session, but much of
the volume increase could be attributed to "quadruple witching" options
expiration. Total volume in the NYSE increased by 34%, while volume in the
Nasdaq was 25% higher than the previous day's level. On the third Friday of the
last month of each calendar quarter, options contracts for stock index futures,
stock index options, stock options and single stock futures (SSF) all
simultaneously expire. This typically results in a volume surge as traders and
investors adjust their corresponding stock positions. Because much of Friday's
increase in volume was attributed to "quadruple witching," it is difficult to
ascertain whether stocks were being accumulated or distributed. In the Nasdaq,
advancing volume exceeded declining volume by a margin of nearly 2 to 1, but the
NYSE ratio was marginally negative.
In our last newsletter, we showed how the Oil Service HOLDR (OIH | news | PowerRating | PR Charts )
had broken out of its consolidation last Thursday. It followed up with a session
of consolidation on Friday, so it continues to look good for further upside. We
also pointed out the potential entry points that were setting up in both the
CurrencyShares Euro Trust (FXE | news | PowerRating | PR Charts ) and the Market Vectors Gold Miners (GDX | news | PowerRating | PR Charts ).
In Friday's session, both ETFs moved lower, but that's okay because they never
triggered for entry. We mentioned that buying either one without first waiting
for a rally above the previous day's high would be risky because they could
continue to drift lower before finding support and resuming their uptrends. GDX
gapped open above its high of the previous day, but only by nine cents. As you
know, we always require a stock or ETF to trade at least 10 to 15 cents
above a pivot before entering. GDX never did. Still, we continue to like both
ETFs for potential entry in the coming week. We'll be keeping an eye on their
performance and will send an intraday e-mail alert to subscribers if/when we
enter either of them. On the downside, the Transportation sector (and IYT)
continues to display relative weakness and a topping chart pattern.
Both the S&P 500 and Dow Jones Industrial Average concluded
last week at new six-year highs, but several key indexes have run into key
resistance levels. Perhaps the biggest concern for bulls should be the lagging
Nasdaq Composite Index. As illustrated on the daily chart below, the prior high
of 2,468 that was set on November 24 has become a pivotal resistance level:
On Friday morning, the Nasdaq probed above its November 24
high by trading up to 2,470, but the breakout attempt immediately failed,
causing the index to close below its previous day's high. Going into today,
traders and investors will be focused on whether or not the Nasdaq can break out
and hold above the 2,468 to 2,470 area. If it can, it will help to
confirm the new highs in the S&P and Dow, but an inability to follow suit by
moving to a fresh high will likely put the S&P and Dow breakouts in jeopardy.
One determining factor will be the direction of the Semiconductor Index ($SOX).
Recall that we illustrated in the November 15 issue of
The Wagner Daily
how the $SOX remains stuck in "no man's land."
It's not only the Nasdaq that is showing relative weakness to
the S&P and Dow. Both the small-cap Russell 2000 and S&P Midcap 400 indices are
also having trouble with the overhead supply from their prior highs. Take a
look:
In the Russell, there is a band of horizontal price resistance
between the 795 to 801 area. In the S&P Midcap, 822 is the magic number that the
index must overcome. Not surprisingly, the talking heads of the financial media
spend minimal time discussing the performances of both these indexes. Instead,
they typically focus on the "Big 3" of the benchmark S&P 500, Dow, and Nasdaq.
Since the Russell and S&P Midcap indexes usually outperform and lead the broad
market in both directions, it is ironic they are rarely given the analysis they
deserve. We would even go as far as to say that, over the past several years,
the Russell 2000 has become a more accurate barometer of the stock market's
health than the $SOX index. When combined with the Nasdaq's resistance, we
anticipate that a failed breakout in either the Russell or S&P Midcap will begin
to attract the interest of the bears. Nevertheless, it remains risky to be
aggressively short right now because the S&P and Dow are both at new highs.
Remember to trade what you see, not what you think!
Open ETF positions:
Long QID, short IYT (regular subscribers to
The Wagner Daily
receive detailed stop and target prices on open positions and detailed setup
information on new ETF trade entry prices. Intraday e-mail alerts are also sent
as needed.)
Deron Wagner is the head trader
of Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (morpheustrading.com),
which he launched in 2001. Wagner appears on his best-selling video, Sector
Trading Strategies (Marketplace Books, June 2002), and is co-author of both The
Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader
(McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and
Yahoo! FinanceVision. He is also a frequent guest speaker at various trading and
financial conferences around the world. For a free trial to the full version of
The Wagner Daily or to learn about Deron's other services, visit
morpheustrading.com or send an e-mail to
deron@morpheustrading.com .
