Gold Is Not All That Glitters...Silver Shines Too!

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

Like the previous day, stocks gapped higher on the open, but subsequently failed to gain any ground. After drifting in a tight, horizontal range intraday, the major indices finished moderately higher. The S&P 500 and Nasdaq Composite scored identical gains of 0.4%, while the Dow Jones Industrial Average advanced 0.3%. Small-cap stocks maintained their newfound relative strength, as the Russell 2000 Index rallied 0.7%. The S&P Midcap 400 similarly tacked on 0.6%. Each of the broad stock market indexes except the Nasdaq closed near the middle of their intraday ranges. The Nasdaq settled in the bottom third of its range.

Turnover receded across the board, preventing the Nasdaq from registering a third straight day of institutional accumulation. Total volume in the NYSE declined by 21%, while volume in the Nasdaq came in 22% lower than the previous day's level. Volume in both exchanges slipped below average levels, but market internals were marginally better than the previous session. Advancing volume in the NYSE exceeded declining volume by a margin of 5 to 2. The Nasdaq volume spread was positive by a respectable ratio of 1.7 to 1.

In last Friday morning's newsletter, we pointed out how the Gold and Silver Index ($XAU) had begun to perk up by closing above its intermediate-term downtrend line the previous day. Being one of the top-gaining sectors for a second consecutive day, the $XAU index followed through on that breakout last Friday. The index itself moved back above its 50-day moving average, but the StreetTRACKS Gold Trust (GLD) and Market Vectors Gold Miners (GDX) both closed right below their 50-day MAs. Although not as shimmering and glamorous as gold, spot silver is now showing relative strength. The iShares Silver Trust (SLV) concluded the week with a strong rally above its 50-day MA, and did so on more than double its average daily volume. This also coincided with a bounce off support of its long-term weekly uptrend line. The first chart below illustrates the reversal off the weekly uptrend line, while the daily chart that follows shows the solid close above its 50-day MA. Notice on the second chart how SLV also broke out above its intermediate-term downtrend line:

After two days of strong gains, the gold and silver sector may need to digest those gains by consolidating for a few days. Upon doing so, we expect the sector to build upon last week's advance. When it does, SLV should provide a greater profit potential and lower risk than GLD. We will be stalking for a potential long entry in SLV this week.

One of the few sectors coming under distribution right now is Utilities. After showing relative strength to the broad market for many months, it appears the Utilities HOLDR (UTH), and associated ETFs, may be entering a corrective mode. Within just three days, UTH fell from a new record high down to its 50-day moving average. It bounced off support of that 50-day MA in the middle of last week, but ran into resistance of its 20-day EMA and began to head back down on Friday. If it closes below its 50-day MA a second time, UTH should see sustainable downside momentum in the intermediate-term:

As for the broad market, the S&P, Nasdaq, and Dow each remain near the middle of their ascending channels. Though those channels may be steep, particularly in the S&P and Dow, the major indices have not given any reason to believe that a correction will occur in the near future. Nevertheless, it's prudent to bear in mind that stocks are entering their third month of the current uptrend without so much as the S&P and Dow even dipping below their 20-day exponential moving averages. The Nasdaq did so for a few days, but promptly snapped back above. It's impossible to know how long the current pace of the stock market is sustainable, but one thing is clear. Traders who trade what they see, not what they think have no choice but to remain bullish.

Open ETF positions: Long SMH, FBT, short FXI (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 .

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