These 2 sectors offer the best rewards

The major indices traded modestly lower in a choppy, narrow range throughout most of yesterday’s session before finishing the day mixed and near unchanged levels. The S&P 500 contained itself within a very tight five-point intraday trading range and closed with a 0.2% gain. Both the Nasdaq Composite and S&P Midcap 400 indices gained 0.1%. The Dow Jones Industrials fell 0.1% and the small cap Russell 2000 lost 0.2%. Although stocks closed mixed, it was positive to see the lack of downside follow-through from the previous session’s bearish “distribution day” (at least for now). The longer the broad market can trade near its highs in a narrow range, the more likely the major indices will break out to new highs after the “correction by time.” However, a steep price retracement off the highs creates more overhead supply and is sometimes more difficult for stocks to recover from.

Total volume in the NYSE fell 5% yesterday, while volume in the Nasdaq was the same as the previous day’s level. Obviously, higher volume would have been better since most of the broad market closed higher, but at least stocks did not have back to back distribution days. Market internals were mixed, as advancing volume marginally exceed declining volume in both exchanges.

The most impressive sector action yesterday was in the Gold
Mining Index
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PowerRating), which surged a whopping 6.2% higher and closed at an all-time high! The daily chart of the $GOX below illustrates yesterday’s huge move. While looking at the chart, notice how the 50-day moving average (the teal line) perfectly acted as support when the Gold sector corrected last month. The $GOX only closed one day below its 50-day MA before quickly recovering back above it. When the weekly uptrend is steady, the 50-day moving average often is a great level of support from which to enter new positions:

 

As long-time subscribers know, we have been bullish on the long-term trend of the Gold sector for more than a year and, as such, have been buying Gold related issues each time the sector has presented itself with an ideal entry point. Most recently, we bought
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PowerRating) (Gold Trust) on Nov. 11, as the ETF recovered above its one-month downtrend line and began to consolidate near its highs. So far, this is working out great because Spot Gold gained more than $11 per ounce yesterday and finished at a fresh 17-year high. Obviously, this resulted in GLD closing at a record high as well. The daily chart of GLD below illustrates the breakout that moved in sync with the surge in the Gold Mining stocks:

 

Because GLD finished at a new high, we now expect further upside and will simply trail a stop in order to protect our profit and maximize the gain along the way. This is always a much more profitable approach than attempting to call a top on a stock or ETF that has no overhead resistance. We feel GLD should head for the $50 mark, which corresponds to Spot Gold trading at $500 per ounce. Although there is nothing special about the price of $500, large round numbers like that often carry a psychological element of resistance in the minds of investors and traders. As such, we intend to pay close attention and tighten the stop as GLD approaches the $50 level.

In the full version of yesterday’s Wagner Daily, we presented subscribers with a long setup in
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PowerRating), the fixed-income ETF that follows the price of the 20-year T-bonds. The long-term weekly chart of TLT is choppy and shows no real direction, but we felt that TLT was setting up for a short-term momentum play to the upside. Going into yesterday, TLT was poised to break resistance of its daily downtrend line that had been in place since the high of August 31. Our plan was to buy TLT on a break of that downtrend line, which is exactly what happened in yesterday’s session:

 

As you can see, TLT gapped up and rallied above resistance of its daily downtrend line, which had converged with the 20-day moving average as well. Because there is a lot of overhead resistance and the weekly chart is nothing special, we do NOT expect much more upside in TLT. Therefore, we are only looking to play TLT for a bounce up to resistance of its 200-day moving average, which is presently at $92.14. The 200-day MA also correlates to resistance of the 50% Fibonacci retracement from the August 31 high down to the November 4 low, so that gives us further reason to believe that a target near the $92 level is reasonable. Because the upside target is relatively small, it is important to have a correspondingly tighter stop. Based on our stop and target prices, the trade still gives us a positive 1:2 risk/reward ratio.

As for the broad market, yesterday’s action did little to change the short-term technical picture. The 10,720 level is still a major area of resistance on the Dow, while you need to watch the three-month downtrend line on the S&P 500 (as discussed yesterday). The market is likely to continue trading in a range for at least the next several days, so focus on individual industry sectors with relative strength to the broad market instead.

Open ETF positions:

Long GLD and TLT (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 .