Two indices to watch: SOX and OSX
The divergence between the major indices continued
yesterday, as the market posted mixed results. With little action
ahead of today’s Fed meeting on interest rates, the S&P 500 oscillated in a
narrow, sideways range and finished unchanged. The Dow followed a similar
intraday pattern, but eked out a 0.1% gain. The S&P Midcap 400 outperformed by
closing 0.3% higher, but the small-cap Russell 2000 lost 0.1%. The most
volatility was found in the Nasdaq Composite, where weakness in the
closely-watched Semiconductor Index ($SOX) dragged the tech-heavy index down to
a 0.5% loss.
Total volume in
the Nasdaq rose by 5% yesterday, causing the index to register its third
“distribution day” within the past four weeks. Volume in the NYSE was 10% higher
than the previous day’s level, but a flat close enabled the S&P means
institutional selling was kept at bay. After three straight sessions of gains on
declining volume, it was not surprising that turnover in the Nasdaq picked up on
the first “down” day. While the price to volume relationship in the S&P has been
relatively healthy all week, the Nasdaq’s last four sessions have consisted of
one day of higher volume selling and three days of lower volume gains.
Obviously, this is opposite of the pattern we want to see in a strong market.
Like the closing prices, market internals were mixed as well. In the Nasdaq,
declining volume exceeded advancing volume by a margin of 2.3 to 1, but the NYSE
ratio was positive by just under 3 to 2.
The $SOX index
shed 1.1% yesterday and closed right at its pivotal 444 level that we have
discussed over the past several days. It’s still holding on to support, but a
firm close below 444 would likely have a detrimental effect on the broad market,
even the seemingly unstoppable Dow. As you can see, the Nasdaq will break
support of its prior low if it loses any further ground in today’s session:
The industry
sector with the largest gain yesterday was the Oil Service Index ($OSX), which
rocketed 3.3% higher. After a shakeout attempt the previous day, the $OSX roared
back to life, closing at its highest level since September 7. Our long position
in the Oil Service HOLDR (OIH), which we bought on October 19, popped nearly 5
points (3.8%) as well. As you may recall, we bought OIH when it broke out above
resistance of its five-month downtrend line. Again, we are
not expecting OIH to rally all the
way back to its 52-week high, but are simply playing the upside momentum that
typically occurs from the break of a multi-month trendline. Our OIH price target
remains the same, near resistance of the 200-day moving average at the $142
level.
Two days ago, we
illustrated how the StreetTRACKS Gold Trust (GLD) was nearing triple resistance
of its 50-MA, 200-MA, and primary downtrend line. Such convergence is powerful
resistance, but we felt the recent undercut of its prior low and subsequent
reversal back to the prior high was indicative of the ETF putting in a bottom.
GLD lost 1.9% on October 23, but yesterday’s price action was quite bullish. GLD
gapped another 1.6% lower on yesterday’s open, but immediately snapped back and
began rallying intraday. By mid-day, GLD had recovered back to the previous
day’s high, which it probed above in the final fifteen minutes of trading. GLD
closed only 0.7% higher yesterday, but we really liked the intraday pattern.
More importantly, we noticed that GLD is now forming an
inverse “head and shoulders” pattern on its daily chart. While the regular
“head and shoulders” pattern is bearish and often indicative of a top, the
inverse “head and shoulders” is bullish and often corresponds with a stock or
ETF putting in a bottom. On the chart of GLD below, we have illustrated the
inverse “head and shoulders” (moving averages removed so you can more easily see
the chart pattern):
Just as we often
initiate short positions on the right shoulder of a regular “head and shoulders”
pattern, we like the idea of buying GLD while it is forming its right shoulder
of the inverse “head and shoulders.” If you want to play it more conservative,
consider waiting for a breakout above the “neckline” of the pattern, which would
also correlate to a breakout above the 50 and 200-day moving averages as well.
The only negative of waiting for such an entry price is that the risk/reward of
the trade is greatly reduced. Being that GLD is directly tied to the price of
the spot gold commodity, large overnight gaps above key resistance levels are
another strong possibility. Perhaps the best method of entry overall is to
“scale in” to the trade by initiating a partial position near its current price
level, then add to it on a confirmed breakout above the “neckline.” Regardless
of where you may enter the trade, be sure to keep a protective stop just below
the top of the “head” (the 55.50 area). Keeping it even tighter is not a bad
idea, just as long as you are willing and able to promptly re-enter if
necessary.
Remember that
the Federal Reserve Board meets this afternoon to discuss interest rates. The
firm consensus is that rates will remain unchanged, but, as always, it’s the
accompanying comments that the market will react to. Take it easy with new
position entries ahead of the 2:15 pm EDT announcement, and be prepared for the
usual post-Fed volatility.
Open ETF positions:
Long OIH, short KCE, IWM (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 .