Be wary on options expiration day
After rising throughout the morning
session, stocks fell from their highs yesterday afternoon, but the
major indices still notched their fourth consecutive day of gains. The Nasdaq
again led the way with a 0.4% gain, while the S&P 500 and Dow Jones Industrial
Average closed higher by 0.2% and 0.1% respectively. The small-cap Russell 2000
advanced 0.5%, but the S&P Midcap 400 Index was unchanged. Each of the
broad-based indices briefly dipped into negative territory around 2:30 pm EDT,
but recovered off their lows to close near the middle of their intraday ranges.
Although we planned to hold our winning position in the Pharmaceutical HOLDR
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longer, we made a judgment call to sell it for a 1% gain yesterday due to
negative news that caused Merck
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11% weighting in PPH, so the ETF will have a difficult time going much higher
with such pressure on that stock.
The broad market managed two straight days of higher volume
gains on Tuesday and Wednesday, but turnover declined across the board
yesterday. Total volume in the Nasdaq dropped off by 8%, while volume in the
NYSE was 1% lighter than the previous day’s level. Since stocks sold off from
their highs in the afternoon, it is actually positive that volume dried up a bit
rather than expanded. Market internals were marginally positive in both
exchanges. Despite the recent gains in the S&P 500, volume in the NYSE has
registered above its 50-day average level only one time in the past nine
sessions, confirming that we remain in the midst of the summer doldrums.
Two weeks ago, we pointed out that the StreetTRACKS Gold Trust
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PowerRating), which mirrors the price of the spot gold commodity, had run into
resistance of its three-month downtrend line and was poised for a big move in
either direction. At the time, a few technical factors caused us to think GLD
would break out above that downtrend line and surge higher, but that has not
happened. Instead, its downtrend line has remained intact, forcing gold to drift
lower. Until yesterday, selling short GLD was a bit too risky, but it closed
below key support of both its 50-day moving average and its two-month uptrend
line. Looking at the daily chart below, notice how its primary downtrend (the
descending red line) remains in effect, and support (the ascending dashed blue
line) has been broken as well:
We remain bullish on the long-term prospects of gold, but it
appears short and intermediate-term momentum has shifted to the downside. As
such, subscribers will see below we are stalking GLD for a potential short sale
entry today. As recently detailed, the iShares DJ Real Estate Index
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also remains on our short sale watchlist.
Today is monthly options expiration day, so be on guard for
potential volatility and odd moves in the late afternoon. Most of the time, we
avoid entering new positions in the latter half of the day on options expiration
days, which occur on the third Friday of each month. This is because many of the
moves tend to be falsely exaggerated, as institutions attempt to move stocks
closer to the strike prices that will cause the most damage to the most traders.
Therefore, today may be good for simply entering your stops on existing
positions and shutting down early in the afternoon.
Open ETF positions:
Short
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PowerRating) (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 .