Fixed-income ETFs Ready For Another Leg Higher

NOTE: Please click on the charts below to enlarge them if they do not appear clearly.

Driven by a strong earnings report from Apple Computer, stocks gapped firmly higher on yesterday's open, dipped to the flat line just before mid-day, then rallied back to the highs late in the afternoon. Once again, wide divergence between the Nasdaq and the other main stock market indexes was prevalent. The Nasdaq Composite cruised to a 1.7% gain, while the tech-heavy Nasdaq 100 Index leapt 2.2% higher. The S&P 500 and Dow Jones Industrial Average advanced 0.9% and 0.8% respectively. The small-cap Russell 2000 climbed 1.0% and the S&P Midcap 400 gained 0.7%. Like the previous day, all of the major indices closed at their intraday highs.

Total volume in the Nasdaq increased 15% over the previous day's level, confirming the presence of institutional buying in the tech arena, but turnover in the NYSE declined by 6%. The higher volume gains in the Nasdaq enabled the index to score a bullish "accumulation day," a positive sign considering the five recent "distribution days." Trading activity was less enthusiastic in the S&P and Dow. Despite the broad-based gains, market internals were not overly strong. In both exchanges, advancing volume exceeded declining volume by approximately 2 to 1. Most of the market's gains resulted from the opening gap up, as opposed to intraday uptrends.

Since breaking out above resistance of their intermediate-term downtrend lines last week, many of the fixed-income (bond) ETFs have been consolidating in a tight range, near their highs. We recently sold the iShares Corporate Bond (LQD) into strength, which netted a nice profit when considering the monthly dividend distributions. Now, we have our eyes on the iShares 20+ year Gov't Treasury Bond Fund (TLT). If it breaks out above the high of its three-day range, we plan to initiate a long position:

Again, remember that one of the biggest benefits of trading the fixed-income ETFs is their monthly dividend distributions. Though the volatility of the actual ETF is rather low, it's not that bad when considering substantial dividends are paid at the beginning of every month. If we buy TLT on the breakout, our target will be a new 52-week high, at which point we will trail a stop to lock in gains. Our stop will be below support of the recent range.

Though the Nasdaq has been showing relative strength ever since the August 18 broad market bottom, the bullish divergence in the index has really become apparent over the past two days. While the S&P 500 has recovered just over half of its large loss from the October 19 sell-off, the Nasdaq has already recovered all of that day's loss. This is in line with what we said in yesterday's Wagner Daily, which was "If the broad market manages to stabilize near current levels, expect the Nasdaq indices to be the first of the broad-based indexes to zoom back to new highs. If buying the market right now, the Nasdaq is clearly the place to be. . ." After closing below its 20-day EMA for only one day, while remaining firmly above its 50-day MA the whole time, the Nasdaq Composite is once again poised to break out to new highs:

Unlike the Nasdaq, both the S&P and Dow have a lot of overhead resistance from their recent sell-offs, so those indexes will likely be the first to break down to new lows if another round of selling hits the market. The current dynamic in the market is rather unusual, as the price divergence within the main stock market indexes is quite substantial. Other than sitting in cash, which is never a bad idea, the only logical thing we can do is follow the trends through buying strong sectors in the Nasdaq when they pull back, and/or selling short the weak sectors in the S&P/Dow when they bounce into resistance.

Open ETF positions:

Long - (none)
Short - XLU, OIH

NOTE: Regular subscribers to The Wagner Daily receive daily updates on the open positions above, as well as new ETF trade setups, including trigger, stop, and target prices. Intraday e-mail alerts are also sent on as-needed basis.

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. Wagner is currently working on this third book, scheduled for publication in early 2008.

For a free trial to the full version of The Wagner Daily above, which includes detailed ETF trade setups and daily position updates, or to learn about our other newsletters, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com.

<< My Home | TheMoneyBlogs Home

• It's Not Armageddon. . .
• Basic Materials Sector Forming Short-term Bottom
• Disappointed? Yes. Discouraged? No.
• Stop! Hammer Time!
• Japanese Yen ETF Setting Up For Buy Entry

• October 2008
• September 2008
• August 2008
• July 2008
• June 2008
• May 2008
• April 2008
• March 2008
• February 2008
• January 2008
• December 2007
• November 2007
• October 2007
• September 2007
• August 2007
• July 2007
• June 2007
• May 2007
• April 2007
• March 2007
• February 2007

• PowerRate Your Favorite Stock Today!
• Morpheus Trading

• Who Has Time For This?