The stock market can easily continue higher

Unlike many of the stock market’s
recent rally attempts, stocks actually held on to their gains from
Tuesday’s monstrous buying spree and even managed to close a bit higher. After
consolidating throughout the day in a sideways range, the S&P 500
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finished 0.2% higher and the Dow Jones Industrials
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gain. A continued recovery in the biotechs and more gains in the semiconductors
helped the Nasdaq
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market again were the small-cap Russell 2000
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indices, which gained 1.1% and 1.0% respectively. In yesterday’s Wagner Daily,
we mentioned that the small and mid-cap sectors were the lowest risk areas to be
long because both indices closed at new record highs on Tuesday and therefore
had no resistance to deal with. The fact that these indices again led the market
is a good example of how indexes, stocks, and ETFs that are trading at new highs
can easily continue higher, even without much buying pressure, simply due to the
lack of sellers who bought at higher prices. This is why we often target
breakouts to new 52-week highs as potential long positions, especially when the
breakout was from a long base of price consolidation.

Total volume in the NYSE declined by 7% yesterday, while
volume in the Nasdaq was 3% lower than the previous day’s level. While it would
have been more positive to see the broad market gain on higher volume, a small
decline in turnover was not surprising considering the previous day’s volume
surge. Further, volume in both exchanges still managed to exceed average levels,
an uncommon occurrence in recent weeks. Market internals were solid, though
certainly not as impressive as the previous day. Advancing volume exceeded
declining volume by a margin of 1.7 to 1 in the NYSE and 2 to 1 in the Nasdaq.

Taking a look at the industry sector action, the only sector
that showed a substantial loss was Home Construction ($DJUSHB), which fell 1.8%.
Note, however, that the index gained 4.3% the previous day. Led by weakness in
IBM, computer hardware stocks also showed weakness, but the semiconductors did
not. The Philadelphia Semiconductor Index ($SOX) added on another 1.8% gain to
Tuesday’s 3.4% advance. Even better than the performance of the $SOX yesterday
was the continuation of monstrous relative strength in both the gold and oil
service sectors. The Gold Index
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Service Index
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day that the $GOX closed at a new record high. The $OSX broke out above its
prior high from January 30 and also closed at a fresh all-time high. A new
25-year high in the price of spot gold and another record high in the crude oil
futures coincided with those gains. If you’ve been paying attention to our
sector commentary and have been long the StreetTRACKS Gold Trust (GLD) for the
past week, you are undoubtedly pleased. However, you may now wish to consider a
tighter stop because GLD is becoming quite extended to the upside and could
easily correct without warning. Looking at the daily chart below, notice how far
away from its 20-day moving average GLD has become. The 20-day moving average
acts like a bungee cord that yanks the price of a stock or ETF back whenever it
stretches too far away in either direction:

While scanning for interesting and fresh ETF setups this week,
we came across an unusual ETF that many traders do not follow, but is showing a
great chart pattern nevertheless. The mystery ETF in question is the iShares
Mexico Index (EWW), which is comprised of publicly traded securities in the
Mexican stock market. International ETFs in general have been very hot over the
past year, but the problem is that many of them are already too far extended
from their breakout levels in order to be considered for long entry. EWW,
however, has been consolidating in a sideways range for nearly four months and
is now poised to finally break out to a new high. The horizontal lines on the
chart below mark the upper and lower channels of this range:

Obviously, nobody knows for certain when, or even if, EWW will
resume its multi-year uptrend by breaking out to a new high, but you may wish to
set a price alert on your trading software so that you are instantly notified
when it finally takes off. The closing high of the range is 39.45, only
nine cents above yesterday’s close. The intraday high of the range is
39.73. Regular subscribers will see the trigger, stop, and target prices for
this setup on “Today’s Watchlist” below.

As for the broad market, we still would like to see the S&P
and Nasdaq prove they can break out to new highs and hold the breakouts
before getting too aggressive on the long side of the stock market. We will
probably see at least a test of those highs very soon (check yesterday’s
newsletter for annotated charts of those highs). Conversely, broad-based shorts
remain a bad bet unless the stock market gives back all of Tuesday’s gains
within the next few days. Overall, it’s okay to have one hand on the buy button
right now, particularly in the sectors showing relative strength, but just keep
your other hand free to hit the emergency brakes just in case. The fact that a
plethora of companies are reporting earnings within the next week is further
reason for caution.