Stocks gapped higher on yesterday's
open, but traders immediately sold into strength, causing the major indices to
fall to unchanged levels within the first hour of trading. After
chopping around throughout mid-day, the broad market followed through on the
opening weakness, causing stocks to break down to new intraday lows. The Nasdaq
Composite led the way lower with a 0.7% loss. The S&P 500 and S&P Midcap 400
indices both fell 0.4%, while the Dow Jones Industrial Average slid 0.3%. The
small-cap Russell 2000 declined by 0.5%. Each of the major indices closed near
their worst levels of the day.
Total volume in the NYSE declined by 6%, but volume in the
Nasdaq was 8% higher than the previous day's level. The mixed turnover readings
caused the Nasdaq to register a bearish "distribution day," its third within the
past four weeks. The S&P, however, not only showed more relative strength during
the session, but also declined on lighter volume. Yesterday's Nasdaq volume was
the highest it has been since November 15. This tells us that institutions may
be returning to the markets, but on the sell side. The action was a good example
of why we have been advising "sitting on hands" and a mostly cash position over
the past few days. Simply put, buying stocks in a light volume environment is
tricky, especially when stocks are sitting at their highs of a multi-month
uptrend. Market internals were negative in both exchanges. In the NYSE,
declining volume exceeded advancing volume by a margin of 1.7 to 1. The Nasdaq
ratio was negative by 1.9 to 1.
In addition to the Oil and Oil Service sectors, which we still
like due to their "bull flag" chart formations, it also appears that the Gold
Index ($GOX) is poised to head back up after a brief correction. On December 1,
we sold our long position in the StreetTRACKS Gold Trust (GLD | Quote | Chart | News | PowerRating) for a
substantial profit because it was nearing resistance of its August high and we
anticipated a correction. As expected, the downward retracement began one day
later, but yesterday's price action leads us to believe that the correction will
be short-lived. On the chart below, notice how GLD sold off sharply in the
morning, but recovered to close at its intraday high. Such price action formed a
bullish "hammer" candlestick pattern in the process:
Since gold often moves contrary to the direction of the U.S.
dollar, the recent breakout and strength in the Euro should also enable GLD to
bounce back to its highs quickly. There is solid price support near yesterday's
low, so it is relatively low risk to buy GLD here and place a stop below
yesterday's low. One could even put their stop below the 50 and 200-day moving
averages, just as long as share size was reduced in order to allow for the
additional risk of a wider stop. Note that the iShares Silver Trust (GLD | Quote | Chart | News | PowerRating) is
displaying a similar chart pattern and has even more relative strength than GLD.
The Market Vectors Gold Miners (GDX) tracks the price of gold mining stocks, as
opposed to the spot gold commodity, but it looks pretty good too.
Although the S&P 500 SPDR (SPY | Quote | Chart | News | PowerRating) is still near its six-year
high, the Nasdaq 100 Tracking Stock (QQQQ | Quote | Chart | News | PowerRating) appears to have formed a "lower
high" within the context of its primary uptrend line. Most likely, this will
result in a break below the lower channel of its four-month uptrend line that is
closed at yesterday. If that happens, the index should at least test support of
its "swing low" that was formed on December 1. This is illustrated on the daily
chart of QQQQ below:
If the December 1 low fails to hold, QQQQ will have formed its
first "lower high" and "lower low," indicating a short to intermediate-term
trend reversal. At the very least, a break below its prior low of 43.26 should
lead to a test of the 50-day moving average, presently at 42.74. Beyond that, a
retracement to near the November 3 low of 41.61 is not unrealistic. QQQQ
obviously needs to form a "lower low" first, but yesterday's bearish pattern
increases the likelihood of at least testing that low before attempting to move
higher. Because of the Nasdaq's decisive move, we shifted out of "SOH mode" to
"dip a toe in the water" with regard to trading the broad-based ETFs. Per
intraday e-mail alert to subscribers, we bought the UltraShort QQQ ProShares (QID | Quote | Chart | News | PowerRating)
when it broke out above its 20-day moving average. Like all the other UltraShort
ProShares funds, QID is inversely correlated to the price of the Nasdaq 100, and
at a 2 to 1 ratio. As of the close, the position is showing a marked-to-market
gain of just under 1%.
Open ETF positions:
Long QID, USO, short RKH (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 .
