Nasdaq Approaching Upper Channel Of Uptrend

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

After oscillating in a sideways range throughout most of the day, a positive reaction from the Fed policy minutes sparked a broad rally in the final ninety minutes of trading. This time, the S&P and Dow slightly outperformed the Nasdaq for a change. The Nasdaq Composite gained 0.6%, the S&P 500 0.8%, and the Dow Jones Industrial Average 0.9%. The small-cap Russell 2000 climbed 0.7% and the S&P Midcap 400 rallied 0.8%. Each of the major indices closed near their intraday highs.

Volume returned after the passing of the Columbus Day holiday. Total volume in the NYSE increased 39%, while volume in the Nasdaq came in 25% above the previous day's level. Nevertheless, the turnover increase was not enough to push volume levels above their 50-day averages. It has been several weeks since volume in either the Nasdaq or NYSE came in above average, indicating that institutions have not been aggressively supporting stock prices. Still, it doesn't require a lot of buying interest to push the major indices higher when they are already trading at new highs. Demand only needs to be marginally higher than overhead supply, which is basically non-existent when an index or stock is at a new 52-week high. Advancing volume in the NYSE exceeded declining volume by nearly 3 to 1. The Nasdaq ratio was positive by just over 3 to 2.

Recently, we have been analyzing the near-term pullback in the StreetTRACKS Gold Trust (GLD), as well as discussing potential entry points in anticipation of further price appreciation. Perhaps an even better opportunity is The Market Vectors Gold Miners (GDX), which is comprised of a basket of gold mining stocks. GLD, on the other hand, mirrors the price of the spot gold commodity. Until recently, GDX was lagging behind and showing relative weakness to GLD. However, this appears to have changed since the recent top was put in place. Yesterday, for example, GDX rallied 2.6%. GLD gained just 0.8%. Now, its three-week base of consolidation has GDX poised to break out to a new high. If it does, we will look to buy the breakout:

The daily chart of the Nasdaq has begun to move above the upper channel resistance of its intermediate-term ascending trend. This is illustrated below:

Though a strongly trending index can hug the upper channel of an uptrend for a long time, one of the most reliable indicators for an index being "overbought" is when it climbs above the upper channel. This, of course, does not mean that it will immediately snap back into the range of the primary ascending channel. However, it does mean that stops on long positions should be trailed tightly and new long positions should probably be avoided until a decent correction eventually comes. At the least, we would want to see a pullback to the 10-day MA, presently at the 2,743 level. Even better would be a retracement to the 20-day EMA (at 2,703).

A pullback from current levels would be good for the overall health of the market, as it would prevent stocks from getting too overheated. But it's also important that sharply higher volume does not coincide with a correction. The Nasdaq already had two days of higher volume selling last week, so more than two additional "distribution days" within the next several weeks would put the current uptrend in danger.

The positive for the market is that the rallies in the S&P and Dow have been more gradual. Neither is yet in danger of being significantly "overbought," at least in the short-term. Remember that quarterly earnings season is kicking in. As such, be prepared for the unpredictable moves that follow earnings surprises in market-leading companies.

Open ETF positions:

Long - LQD, DUG
Short - (none)

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.

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