GLD and SLV are both set to move
The major indices wrapped up the month of August with a
relatively flat session, but higher volume hinted at a bit of selling
into strength. Both the S&P 500 and Dow Jones Industrial Average edged less than
0.1% lower, while the Nasdaq Composite snapped its five-day winning streak by
losing 0.1%. The small-cap Russell 2000 was unchanged, but the S&P Midcap 400
woke up and rallied 0.4%. Stocks attempted to break out in the final ninety
minutes of trading, but the attempt failed, sending the broad market back down
to finish where it spent the first half of the day. The S&P, Nasdaq, and Dow all
finished in the bottom third of their intraday ranges, though the Nasdaq showed
the most relative weakness.
Total
volume in the both the NYSE and Nasdaq was 4% higher than the previous day’s
levels. Although the major indices finished nearly unchanged, it was actually
bearish that turnover increased. When consolidating at the top of a range, you
want to see decreasing volume because it indicates the bears are not stepping in
while the buyers are taking a rest. However, if near the high of a range,
increasing volume occurs without corresponding gains often points to traders
selling into the strength of a rally attempt. This is known as “churning” and
should serve as a warning sign that a short-term top may be forming. We liken
“churning” to a sports car that attempts to accelerate too fast. Rather than
shooting down the highway, it will merely spin its wheels in place. Conversely,
the opposite volume pattern is effective at predicting short-term bottoms. If,
at the low of a range, you see increasing volume without further price losses,
it indicates traders are buying into weakness and accumulating shares of stock.
Remember that volume is the one technical indicator that never lies and is the
most accurate leading technical indicator at your disposal.
Shortly
after yesterday’s open, we sent an intraday e-mail alert to regular subscribers,
informing them that the iShares Silver Trust
(
SLV |
Quote |
Chart |
News |
PowerRating) had broken out above of a
range of bullish consolidation and that it looked good for a potential purchase.
It subsequently gained two more points throughout the remainder of the session
and looks good for further upside in the coming days to weeks. As you might
recall, we initially bought SLV when it first broke out above its 50-day moving
average on August 1. SLV subsequently hit our trailing stop price on August 11,
netting us a gain of more than 2.5 points on the trade. Because we suspected
that it may have been a “shakeout,” we continued monitoring the price action of
SLV in the weeks that followed. It has acted well since then, consolidating in a
relatively tight range near its highs. That bullish consolidation has built a
solid base of support, which is the reason we told subscribers about yesterday
morning’s breakout above the range. The daily chart of SLV illustrates the clear
breakout above the range:
Since
we’ve been discussing the bullish pattern in silver, you may be wondering why we
did not buy gold instead. The answer is simply that gold has been showing much
more relative weakness than silver. The StreetTRACKS Gold Trust
(
GLD |
Quote |
Chart |
News |
PowerRating), which
mirrors the price of the spot gold commodity, technically remains in an
intermediate-term downtrend that has been in place since the middle of May.
While SLV was consolidating in a narrow, sideways range throughout the month of
August, GLD was drifting lower. Obviously, we always want to buy the sector ETFs
that exhibit the most relative strength, NOT those that are lagging behind.
Nevertheless, GLD gained 1.4% yesterday and closed just above its 50-day moving
average. It also finished right at resistance of its multi-month downtrend line:
If you
compare the charts of GLD and SLV, you should easily notice the divergence
and relative strength of SLV over GLD. However, that being said, it appears that
GLD will now attempt to break out above its downtrend line as well. If it clears
yesterday’s high, it would not be a bad idea to take a shot at buying shares of
GLD, but the corresponding gains in SLV are likely to outpace those of GLD.
Notice also that GLD briefly broke out above its downtrend line in early August,
but failed to hold the breakout. One must therefore be on alert for a possible
repeat of the same scenario.
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 .