Here are some key sectors to watch
Stocks wrapped up last week with little fanfare, as the
major indices recovered from morning weakness to finish with mixed results.
Both the S&P 500 and Nasdaq Composite managed to close 0.1% higher, but the Dow
Jones Industrial Average took a breather and finished 0.1% lower. Considering
the Dow was showing a 0.6% loss after the first thirty minutes of trading, the
index continued to show pretty good resiliency. The small-cap Russell 2000 and
S&P Midcap 400 indices each fell 0.7%, although both indices outperformed the
S&P and Nasdaq the previous day. Overall, last Friday’s session showed
surprisingly low volatility for an options expiration day.
Total
volume in the NYSE increased by 1% yesterday, but volume in the Nasdaq was 5%
lower than the previous day’s level. Curiously, it was the second day in a row
that the S&P gained 0.1% on a 1% increase in volume. The Nasdaq also closed
marginally higher, but on decreasing volume, for the second consecutive day.
Turnover in both exchanges remained above average levels. Despite the small
gains in the S&P and Nasdaq, market internals were negative in both exchanges.
In the NYSE, declining volume exceeded advancing volume by a margin of 1.3 to 1.
The Nasaq ratio was only fractionally negative.
Most
industry sectors closed last Friday within one percent of unchanged levels, so
only a few sectors stood out. On the upside, the Airline Index ($XAL) gained
3.1% and was the biggest industry gainer on our daily watchlist. Because the
sector is so small, there are not any ETFs that specifically track the airline
stocks. The Telecom ($XTC) and Pharmaceutical ($DRG) indices, both in steady
uptrends and at their 52-week highs, moved higher with gains of 0.9% and 0.7%
respectively.
The
Semiconductor Index ($SOX), which was at a “make it or break it” level going
into Friday’s session, was little changed. The $SOX moved 0.4% lower, but is
still right in the vicinity of its pivotal 50-day moving average. The October 19
low of 444 is critical support, as a break below that level would confirm a
break of both its 50-day moving average and its prior low of October 3.
When we last looked at the daily chart of the $SOX, we focused only on the
50-day moving average, but the prior low is key support of a five-week
consolidation period as well. The dashed horizontal line on the chart below
represents support of that October 3 low:
On the
downside, a drop in the price of crude oil last Friday put pressure on our
recent entry in the Oil Service HOLDR
(
OIH |
Quote |
Chart |
News |
PowerRating), but it is still holding in the
upper half of its recent range and is well above our stop. As always, we are
taking a “set it and forget it” attitude about our protective stop, which is
just below the 20-day moving average. After you have identified a quality trade
setup, determined a logical stop price, and set a general price target, setting
a mechanical stop (adjusted per the
MTG Opening Gap Rules when necessary) removes the anxiety from the trade.
The trade will either be a winner or loser, but worrying about the outcome of
any individual trade causes you to miss other opportunities that arise right in
front of your face.
One
sector ETF that has come onto our radar screen for potential long entry is the
StreetTRACKS Gold Trust
(
GLD |
Quote |
Chart |
News |
PowerRating). After gaining a whopping 75% from July of
2005 through May of 2006, GLD entered a corrective phase. Since peaking in May,
it has corrected as much as 24%, but GLD is now poised to break resistance of
its five-month downtrend line and resume its weekly uptrend. Interestingly,
three major resistance levels have now converged just overhead the current price
of GLD: the 50-day MA, 200-day MA, and five-month downtrend line. We have
circled this area of triple confluence on the daily chart below:
Obviously, this triple convergence is indeed a major resistance level and long
entries should not be attempted until GLD breaks out above the 59.80
area. However, we feel GLD will test that level and try to breakout within the
coming days. The recent “undercut” of the mid-September lows that occurred in
the beginning of October is bullish because it likely washed out all the
remaining “weak hands.” Often, an “undercut” of a prior low is necessary in
order for a downtrending stock or ETF to reverse its trend. We also like that
volume has been steadily declining over the past month, another sign that the
sellers are drying up. Again, it is too risky to buy GLD before it actually
breaks out above its “triple trouble” resistance, but the upside momentum that
results from such a breakout should be rather substantial. GLD has now been
added to our watchlist for potential entry, so regular subscribers should note
the trigger, stop, and target prices below.
The
broad market was relatively quiet last week, but it held up well, only
correcting off its recent highs by a small percentage. The major indices have
been in a tight range over the past several days, so look for a volatility
expansion very soon. The primary trend would favor an upward breakout out of the
range, but on the other hand, the S&P and Nasdaq still remain near the upper
channels of their uptrend lines. We continue to maintain a neutral to bearish
near-term bias, but are bullish on the intermediate-term trends. Don’t forget
that quarterly earnings season is in full swing. The deluge of earnings reports
continues this week, as Texas Instruments
(
TXN |
Quote |
Chart |
News |
PowerRating) and Amgen
(
AMGN |
Quote |
Chart |
News |
PowerRating) are
among the notable companies reporting after today’s close. As always, remember
to trade what you see, not what you think!
Open
ETF positions:
Long OIH,
short KCE (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 .