GLD is Testing Support Here
For the second consecutive day, the
stock market gapped higher on the open, then promptly turned tail and headed
south. But this time, each of the major indices finished in the red.
Significant divergence occurred between the growth-oriented small cap stocks and
the blue chips. The Russell 2000 Index fell 1.4%, but the Dow Jones Industrial
Average lost less than 0.1%. The S&P Midcap 400 slid 1.0%, the Nasdaq Composite
0.9%, and the S&P 500 0.3%. Like the previous session, each of the major market
indices closed near their intraday lows.
Total volume in the NYSE declined by 29%, while volume in the
Nasdaq came in 21% lighter than the previous day’s level. The lower turnover
enabled both the S&P and Nasdaq to dodge a bearish “distribution day,” but
remember that the previous day’s volume levels were skewed higher by the
“quadruple witching” options expiration. Market internals began the day in
positive territory, but steadily deteriorated throughout the session. Declining
volume in the NYSE exceeded advancing volume by a margin of just under 2 to 1.
The Nasdaq ratio was negative by 2.7 to 1.
Looking at the industry sectors, the energy stocks were among
the biggest losers yesterday. The Oil Service Index ($OSX) plummeted 3.9%,
dragging the Oil Service HOLDR
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above the high of its two-week consolidation, OIH failed the breakout and
actually closed at the low of its prior range. Obviously, this is very bearish
action, so we are no longer bullish on the oil and oil service sectors. If you
kept your protective stop in OIH just below support at the 148.50 area, as we
initially suggested, your loss from the failed breakout would have been minimal.
If, however, you did not yet cut your loss, consider selling into strength of
any bounce in today’s session.
The mining stocks also showed relative weakness yesterday,
causing the Gold and Silver Index ($XAU) to slide 1.6%. However, the recent
correction in the spot gold commodity has caused the StreetTRACKS Gold Trust
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to fall to support of the confluence of its 50 and 200-day moving averages:
As you can see, GLD closed at a very pivotal support level.
Most of the time, an index or stock will at least attempt to bounce off the
first test of its 200-day moving average support. When combined with support of
the 50-day moving average at the same level, the odds are even higher that GLD
at least bounces in the near term. Not only is it sitting on support of its 50
and 200-day moving averages, but it also closed at support of its uptrend line
from the October low. Although we have been stalking the Market Vectors Gold
Miners (GDX) for potential long entry, GLD may provide a more clear entry point
at its current level. A continuation of the bullish trend in the Euro/Dollar
(and FXE) will also help GLD. We like these kind of long entries because the
risk/reward ratio is so high. If the convergence of support holds firm, as we
anticipate it will, the upside profit potential is quite substantial. But if it
trades more than a few cents below yesterday’s low, you can quickly sell the
position for a minimal loss. The potential reward is much higher than the risk,
which is what we mean by a positive risk/reward ratio.
In yesterday’s newsletter, we discussed how the S&P and Dow
have been holding near their highs, but the Nasdaq, Russell 2000, and S&P Midcap
400 indices are stuck at resistance of their prior highs. Yesterday’s relative
weakness in the latter three indices was further confirmation of the major
divergence that is taking place. The jury is still out on how long the S&P and
Dow will remain at their six-year highs, but it’s becoming increasingly likely
that the Nasdaq, Russell, and S&P Midcap indices will soon fall to at least test
support of their 50-day moving averages. Not only are these market leading
indexes beginning to roll over, but leading stocks such as Google and Apple
Computer have also begun to break down. If leadership by the top growth stocks
continues to fade, the broad market will be hard pressed to move to the upside.
For that reason, we have shifted our overall short-term market bias to the
bearish side and the intermediate-term bias to neutral. Proceed with extreme
caution on any new long entries, especially those that are correlated to the
Nasdaq.
Open ETF positions:
Long
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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 .