Follow institutional traders–here’s how

After beginning the day with an
upside opening gap, stocks trended lower and
into negative territory, but a modest rally in the final hour minimized
yesterday’s losses. The S&P 500, Nasdaq Composite, and small-cap Russell 2000
indices each lost 0.2%, while the Dow Jones Industrial Average was unchanged.
For the first time in a while, the mid-cap S&P 400 Index showed relative
weakness and closed 0.7% lower. The major indices again closed near the middle
of their intraday ranges, indicating a indecision amongst traders.

Total volume in the NYSE rose by 2% yesterday’s, while volume
in the Nasdaq came in 5% above the previous day’s level. The S&P and Nasdaq
losses on higher volume technically made yesterday a bearish
“distribution day,” but the broad market’s losses were small and the increase in
turnover was minimal. Declining volume exceeded advancing volume in both
exchanges, but only by a small margin. The rally in the final hour helped to
close the spread on the bearish market internals from mid-day.

Because institutions account for approximately two-thirds of
the stock market’s average daily volume, it is important to know what
institutional traders are doing so that you can trade in the same direction. The
best way to do so is by regularly following the broad market’s volume patterns,
as volume is the footprint of institutional activity. Volume is also the one
technical indicator that never lies! Studying the volume pattern of the past
week, the action has been interesting.

On January 19, the S&P 500 gained on higher volume, making it
an “accumulation day”. But on January 20th, the S&P 500 registered a
“distribution day” by falling nearly 2% on its highest volume in nearly a year.
The S&P bounced modestly the following day, January 23, but on lighter volume.
On the 24th, the S&P had a small gain “accumulation day,” but posted another
bearish “distribution day” on January 25th. Putting it all together, there have
been two “accumulation days” and two “distribution days” within the past five
sessions. On the surface, this indicates institutional indecision, but both
“distribution days” have been on higher volume than the “accumulation days”,
especially on January 20. Looking solely at volume patterns, the scales are
tipped to the bearish side in the short-term. Bearish daily chart patterns
confirm what the volume is telling us.

Performance within the specific industry sectors was rather
mixed yesterday. On the downside, the Oil and Utilities sectors posted the
largest losses. The Oil Service Index ($OSX) fell 2.8%, its largest loss in
months. However, a correction of that magnitude is not surprising given the
sector’s parabolic gains over the past year. Conversely, Gold continued its
upward march. The $GOX index zoomed 2.3% higher and finished at a new all-time
high, as did GLD, the ETF that mirrors the price of the Spot Gold commodity.
Note, however, that GLD also registered its highest volume day ever, which could
be a sign of short-term exhaustion:

The huge volume spike at the top may indicate that GLD (and
Spot Gold) needs to take a rest, but we noticed an interesting divergence
yesterday; Spot Silver and the silver-related shares have suddenly begun to show
relative strength and are now ready to break out to new highs. There is not an
ETF that specifically tracks the Silver stocks, but you may consider building
your own “synthetic ETF” by simultaneously trading a basket of silver stocks.
PAAS, AEM, and SSRI are three silver stocks that are each poised for breakouts
(notice the high volume in each one yesterday).

In yesterday’s Wagner Daily, we illustrated how both
the S&P 500 and Nasdaq Composite had formed “bear flag” patterns on their daily
charts and were poised for follow-through to the downside. The S&P did indeed
trade below its pivotal 50-day moving average, but the index again finished the
day just above it. It was the fourth consecutive day the S&P closed just above
its 50-day MA, which has been acting like a magnet. The longer the index stays
glued to its 50-day MA, the more powerful the move will be when it resolves
itself in one direction or the other. We still feel the eventual resolution will
be to the downside, but be prepared with tight stops if it is not because the
move could be fast and furious. The same goes for the Nasdaq, which also is
clinging to its 50-day MA.

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