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

The main stock market indexes began the day on a positive note, rallying to gains of more than 1% by mid-day, but the bears resumed control in the afternoon, sending stocks back to unchanged levels.  A modest recovery into the close enabled the major indices to close higher, but in the middle of their intraday ranges. The Dow Jones Industrial Average gained 0.3%, the S&P 500 0.5%, and the Nasdaq Composite 0.6%.  The small-cap Russell 2000 and S&P Midcap 400 indexes were higher by 0.4% and 0.6% respectively.  Although stocks closed modestly higher, the action was not indicative of bullish follow-through from Tuesday's late afternoon strength.  Overall, the session was quite indecisive.

Total volume in the NYSE declined 10%, while volume in the Nasdaq similarly eased 13% below the previous day's level.  Higher turnover would have helped to confirm yesterday's gains, but institutions backed away instead. Market internals were on the bullish side, but not by a wide margin.  Advancing volume in the NYSE exceeded declining volume by just over 3 to 2.  The Nasdaq adv/dec volume ratio was positive by a little less than 2 to 1.

After an impressive rally throughout all of February, of which we participated with a few short-term trades, the various commodity ETFs formed bearish reversal bars on March 4.  As commodities clearly remain the strongest group in the stock market, we would have actually welcomed a near-term correction to provide us with low-risk re-entry levels, but they took off again yesterday.  Commodity-based ETFs that zoomed to new all-time highs yesterday include:  U.S. Oil Fund (USO), DB Commodity Index Fund (DBC), StreetTRACKS Gold Trust (GLD), and iShares Silver Trust (SLV).  The U.S. Natural Gas Fund (UNG) also moved to a new high within its current uptrend, but is still below its 52-week high.

In the February 28, 2008 issue of The Wagner Daily, we pointed out the relative strength that Silver (SLV) began showing over Gold (GLD) just a few days earlier.  We then suggested that its relative strength meant SLV would provide more future profit potential, along with less risk during a pullback.  One week later, let's take an updated comparative look at SLV versus GLD.  The overlay chart below compares the percentage changes of SLV and GLD over the past ten days:

The black vertical line on the chart above marks the closing prices of SLV and GLD when we first pointed out the divergence and relative strength of SLV in our February 28 commentary.  The divergence started to become clear on February 22, and SLV then went on to outperform GLD by more than 6% in the days that followed (7.8% vs. 1.6%).  The beauty of relative strength trading is that divergent trends usually remain that way for many weeks, or even months.  That's why we suggested that, between the two ETFs, SLV was likely to gain more than GLD in the days and weeks that followed.  Now, one week later, notice that SLV has outperformed GLD by more than 11% over the past ten days. 

More importantly than the outperformance on the upside, the chart above is also a good example of how ETFs with relative strength pull back less when the general market does.  On March 4, notice that SLV only corrected down to support of its February 28 and 29 lows.  Conversely, GLD dropped below support of those lows on March 4.  Because it dropped less during the pullback, it was much easier for SLV to shoot firmly to a new high yesterday.  We analyze the chart above not to "toot our own horn," but as a great educational example of the importance of always buying the ETF with the most relative strength within the sector.  This style of relative strength ETF trading is discussed thoroughly in my upcoming book, scheduled to be published by Bloomberg Press on July 1 of this year. 

If one only looked at the recent performance of commodity, energy, and mining ETFs, one could be forgiven for thinking we're in a raging bull market.  However, the reality is that a majority of the major industry sectors are consolidating near their recent lows, perilously close to losing key support.  It's obvious that financial stocks have gotten hammered, but sectors such as retail are also looking pretty heavy.  Check out the daily chart of the Retail HOLDRS (RTH):

For the past five weeks, RTH has been stuck in a choppy, sideways range. Right now, this chart is nothing we would touch on the long or short side.  But if RTH breaks below the March 3 low (illustrated by the dashed horizontal line above), we will probably enter a short position.  With convergence of the 20 and 50-day moving averages pressing down on RTH, there's a good chance that will happen.  Looking at the longer-term weekly chart, one will also notice that RTH has also been in a primary long-term downtrend since July of 2007.  Therefore, odds favor a resumption of the well-established downtrend until the market proves otherwise.  Just remember to patiently wait for the proper trigger price, as it is dangerous to "jump the gun" for an early short entry before the actual break of support.

Forming a similar chart pattern as the retail sector, real estate is also poised to make another leg down.  Notice the similarities on the chart of the iShares U.S. Real Estate Index (IYR):

As with RTH, we are simply looking for a break of key horizontal price support to initiate a short position in the real estate sector.  However, we will probably buy the inversely correlated UltraShort Real Estate ProShares (SRS) if it breaks out above its recent range instead.

Yesterday, we said of the broad market that, "Frankly, cash is the best position until either one of two scenarios occurs:  the major indices close firmly above their 20-day EMAs or they close below yesterday's (March 4) lows. . .For the S&P 500, yesterday's (March 4) low is 1,307 and the 20-day EMA is at 1,353.  For the Dow, the levels are 12,032 and 12,420.  The Nasdaq Composite's low is 2,221 and the 20-day EMA is at 2,320."  Since yesterday's gains were not strong enough to even test the 20-day EMAs, our view of the broad market remains the same going into today.  Select industry sectors we've been discussing can be momentum traded in the short-term, but stay away from the broad-based ETFs until they "make it or break it."

Open ETF positions:


Long - (none)

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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