Some positive signs came out of Friday’s lower close
The broad market gapped down last Friday morning, but
subsequently traded in a narrow, sideways range throughout the session.
The major indices finished the day lower, but their losses were minimal
considering the recent gains. Both the S&P 500 and Nasdaq Composite slipped
0.3%, while the Dow Jones Industrial Average held near its all-time high by
losing only 0.1%. The small-cap Russell 2000 fell 0.4%, while the S&P Midcap 400
declined 0.6%. All the indices finished near the middle of their tight intraday
ranges, indicating a bit of indecision into the close. Nevertheless, the stock
market logged impressive gains for the week. The S&P 500 rallied 1% and broke
out to a new five-year high in the process. The Dow cruised 1.5% higher and, as
you’ve surely heard numerous times over the past several days, moved to a fresh
record high. The Nasdaq Composite still remains below even its 52-week high, but
advanced 1.8% last week.
Although
stocks closed lower across the board, it’s positive that they did so on lower
turnover. Total volume in the NYSE declined by 9%, while volume in the Nasdaq
was 14% below the previous day’s level. In strong markets, most of the “down”
days should occur on lighter volume, as it indicates the bears are not taking
control when the bulls are taking a rest. Not surprisingly, market internals
were negative by only a relatively small margin as well. In both the NYSE and
Nasdaq, declining volume exceeded advancing volume by a ratio of just under 2 to
1. The broad market’s insubstantial percentage losses, combined with the lighter
overall volume levels and moderate market internals, indicates that Friday’s
action was merely a healthy price correction within the context of a solid
uptrend.
If
you’re looking for a new long setup that may not be so “obvious” to the crowd,
consider the iShares family of fixed-income funds, most of which are approaching
low-risk entry points on the buy side. Each of these bond ETFs have been in
steady uptrends since the beginning of July 2006, which we pointed out several
times along the way, but they are finally in the process of correcting down to
support of their primary trendlines. Below is a daily chart of the iShares 20+
year Treasury Bond Fund
(
TLT |
Quote |
Chart |
News |
PowerRating). The ascending blue line illustrates support
of the multi-month uptrend, a retracement to which would present an ideal buying
point. A protective stop on such an entry should not be much below the 50-day
moving average (the teal line):
Most of
the ETFs in the fixed-income family have similar chart patterns. This is
important because we always like to have confirmation of similar chart patterns
within the same sector. If, for example, TLT was the only bond ETF that was in
an uptrend, we would pass it by because stocks and ETFs without sector
confirmation usually have a difficult time sustaining a trend. Notice how the
iShares Corporate Bond Fund
(
LQD |
Quote |
Chart |
News |
PowerRating) has been moving nearly in lockstep with
TLT:
Of the
six different iShares bond ETFs, the only one we would avoid is the TIPS Bond
Fund (TIP). It has been showing a lot of relative weakness while the others have
been moving higher, and is the only ETF in the family that is still below its
200-day moving average. Like all ETFs, remember that the fixed-income ETFs pay
dividends whenever the underlying issues do so. In the case of the iShares bond
ETFs, each of them pay dividends on a monthly basis, a nice bonus in addition to
any capital gains you may realize.
Last
week, we pointed out the potential breakout that was setting up in the iShares
Xinhua China 25
(
FXI |
Quote |
Chart |
News |
PowerRating). As you may recall, we were anticipating a breakout
above the high of a tight consolidation at its 52-week high. On October 4, the
breakout came, but FXI fell back down to its breakout level two days later. As
such, it is now at a “make it or break it” level:
Being
that it only closed last week a few cents below the high of the prior
consolidation, it could still easily hold and take off from here. It therefore
provides a great risk/reward level for entry on the long side, just as long
as you keep a tight stop below the October 4 low, which nearly converges
with the 20-day moving average as well. Conversely, we also know that failed
breakouts to new 52-week highs make very nice short selling opportunities as
well. We’ll be monitoring the price action in FXI closely over the next several
days and may take a position. As always, regular subscribers will be notified
via e-mail alert of any intraday entries.
Open
ETF positions:
Long BBH, XHB, short UTH, SMH (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 .