Trade what you see, not what you think

After beginning the day with an
opening gap up, the broad market traded
sideways throughout the first half of the day, but a broad-based rally during
the final ninety minutes lifted the major indices to close with solid gains.
Small cap stocks led the way, as the Russell 2000 Index
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higher. Strength in the Biotech and Technology sectors similarly helped drive
the Nasdaq Composite
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followed suit with a 0.9% advance. The S&P Midcap 400 Index
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1.4%, but the Dow Jones Industrials
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only 0.4% higher.

Confirming yesterday’s buying spree was the fact that turnover
rose on both exchanges. Total volume in the NYSE came in 5% higher, while volume
in the Nasdaq was 8% higher than the previous day’s level. This means that both
the S&P and Nasdaq registered a bullish “accumulation day” and indicates
institutional demand was behind the rally. Volume in both exchanges came in
higher than it did during Tuesday’s bearish “distribution day.” Such a rise in
turnover, combined with yesterday’s broad-based gains, basically erased the
negative effect of Tuesday’s losses. Market internals were also impressively
bullish yesterday. Advancing volume exceeded declining volume by a ratio of more
than 4 to 1 in the NYSE and 7 to 2 in the Nasdaq.

Looking at yesterday’s individual sector performance, you will
see that nearly every industry moved firmly higher. Sectors ranging from
Transportation to Consumer to Technology all showed strong signs of
accumulation, as a plethora of industry sectors closed at new 52-week highs
yesterday. Among them were Transportation
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PowerRating), and Insurance ($IUX). New long entries over the next several weeks
should be concentrated within these sectors, as they are showing the most
relative strength to the broad market. The Gold Mining Sector
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zoomed another 1.5% higher to a record high, bringing the sector’s two-day gain
to 7.8%. Moving in sync with the Gold Mining sector was Spot Gold, as
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(Gold Trust) also gained another 1.5%. We remain long our full position of GLD
and continue to trail a stop higher. As for weak sectors, Oil
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about the only major industry that closed lower yesterday.

One industry that is poised to break out to new highs, but has
not yet done so, is Software
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the sector has been consolidating in a relatively tight range for the past six
months and finished yesterday only 2% below its 52-week closing high:

If trading individual stocks within the Software sector, watch
for confirmation of a breakout above last week’s high of 171.14.
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(Software HOLDR) is the primary ETF that tracks the Software sector. SWH is
currently showing a similar chart pattern to the $GSO index.

Among the most significant technical events in yesterday’s
session is that the Nasdaq Composite closed at a fresh 4-year high yesterday!
Although the Nasdaq 100 Index has been trading at a new high for the past week,
the broader-based Nasdaq Composite had been lagging behind. But yesterday’s
action was impressive because it clears out all prior resistance from overhead
supply. The prior resistance level of 2,200 should now act as the new support.
The weekly chart of the Nasdaq Composite below illustrates the breakout:

Also of technical importance is that the S&P 500 broke out and
closed above its 3-month downtrend line that had been in place since the high of
August 3. It also closed above its prior high from September, giving the index
its first “higher high” on the weekly chart and hinting at a possible trend
reversal and new intermediate-term bull market. The S&P is now less than 2% away
from setting a new 52-week high. In order to do so, the index needs to close
above its August 3 high of 1,245. All traders’ eyes will be closely watching to
see how the S&P acts near this key pivotal level:

Needless to say, the bearish picture from last month has been
completely erased. There are many sectors and ETFs that have broken out of long
bases and have no overhead supply to contend with. Obviously, those are the ones
to position yourself on the long side. Conversely, we are seeing very few short
setups and are not interested in fighting the trend. Remember that the
professional traders always trade what they see, not what they think!

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