Bullish setups in silver and gold
The stock market concluded a bullish week with a
session of solid gains ahead of the holiday weekend. The S&P 500
gained 0.6%, the Nasdaq Composite advanced 0.4%, and the Dow Jones Industrial
Average rallied 0.7%. A one percent correction in the Semiconductor Index ($SOX)
was responsible for the slight relative weakness in the Nasdaq. The small-cap
Russell 2000 lagged even more by gaining only 0.1%. The S&P Midcap 400 closed
0.5% higher. Despite the light turnover, it was a solid week for the major
indices. The Nasdaq Composite led the way with a 2.5% gain, while the S&P 500
and Dow Jones Industrials tacked on 1.2% and 1.6% respectively.
As one
might expect, volume receded from its already lighter than average levels ahead
of the three-day Labor Day weekend. Total volume in the NYSE declined by 14%,
while volume in the Nasdaq was 22% lower than the previous day. Since August 4,
there has only been one day in which volume in the NYSE exceeded its
50-day average level. Such an extended period of light turnover is typical
during the summer doldrums, but the good news is that we should begin to see
volume levels return to normal as traders return from their vacations and
institutions begin stepping back into the markets. On a percentage basis, stocks
had an impressive performance in the month of August, but experience has taught
us to be leery of gains that are made during lengthy periods of below average
volume. Throughout the next one to two weeks, it should become clear whether or
not last month’s gains will be sustainable.
In our
last newsletter, we pointed out the bullish setups that were shaping up in both
the iShares Silver Trust
(
SLV |
Quote |
Chart |
News |
PowerRating) and the StreetTRACKS Gold Trust
(
GLD |
Quote |
Chart |
News |
PowerRating).
Because of its relative strength, we mentioned that SLV was the better choice of
the two, but overnight strength in the spot gold futures is hinting that the
price of gold is now poised to gap and catch up to the price of silver. We
remain long a small position of SLV, which was e-mailed to subscribers as an
“unofficial” entry last Thursday, but we are now considering buying GLD as well.
Of particular interest is the daily chart pattern, which is coiled like a
spring, ready to break out of its recent volatility contraction. The longer a
stock or ETF settles into a tight, sideways range, the more explosive the move
will eventually be when it breaks out above or below that range. When key moving
averages happen to converge with that narrow price band, it fuels the subsequent
volatility expansion even more. GLD has both its 20 and 50-day moving averages
converging at its current price. Further, in the case of an intermediate-term
volatility contraction, the direction of the eventual breakout will usually be
the same as the direction of its long-term primary trend. In the case of GLD,
the weekly chart clearly shows an uptrend. For all these reasons, we like the
idea of buying GLD on a breakout above its multi-month downtrend line, which
would also correspond to a breakout above its sideways range. This is
illustrated on the daily chart of GLD below:
The S&P
500 has retraced nearly all of its loss from the May to June selloff and is only
1.1% below its 52-week high, but the Nasdaq Composite has recovered only half of
its corresponding loss and remains 7.5% off its high. Strength in the tech
sectors has enabled the Nasdaq to show relative strength to the other indices
over the past several weeks, but the “big picture” of intermediate and long-term
Nasdaq weakness has not changed. Looking at the chart below, notice how the
Nasdaq finished last week just above resistance of its prior high from July 3,
but not enough to confirm a breakout above that level. We have also applied
Fibonacci retracement lines to illustrate how the index has recovered only 50%
of its loss from the April high down to the July low:
Going
into the new week, keep a watchful eye on that 2,190 to 2,195 resistance level
because it could provide a convenient excuse for traders to sell Nasdaq shares
into strength. If that occurs, it will obviously be difficult for the other
indices to advance as well. Even if the Nasdaq manages to close firmly above its
prior high of 2,190, resistance of the 200-day moving average (not shown on the
chart above) awaits at the 2,224 area. When the $SOX index began to break out,
we said that buying the breakout would probably work, but we suggested selling
into strength of a short-term move. If you have not already done so, now would
be a good time to tighten your protective stops on any long positions.
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 .