The February highs are here...now what?

The major indices wrapped up the week by drifting in a tight, sideways range throughout last Friday's session, before settling modestly higher. The S&P 500 advanced 0.5%, the Nasdaq Composite 0.2%, and the Dow Jones Industrial Average 0.1%. Small and mid-cap stocks, sectors that often outperform in bullish markets, maintained their recent relative strength. The Russell 2000 and S&P Midcap 400 indices posted identical gains of 1.2%. The S&P and Nasdaq closed in the upper third of their intraday ranges. The Dow finished near the middle of its (quite narrow) intraday range.

Total volume in the NYSE jumped 22%, while volume in the Nasdaq ticked just 4% higher. The broad-based gains on higher volume technically caused both the S&P and Nasdaq to register a bullish "accumulation day." However, much of that faster pace could have been attributed to last Friday being monthly options expiration day. The intraday price action and marginal closing gains were also not very confirming of institutional accumulation. Nevertheless, stocks have still scored two confirmed sessions of higher volume gains within the past week.

Because the precious metals sector is typically viewed as a "safe haven," recent broad market strength has caused the previously strong gold and silver ETFs to lose their shine. However, for the second time this month, SPDR Gold Trust (GLD) has come into pivotal support of its 200-day moving average. Since it's common for "double bottoms" to form at 200-day moving averages, we'll be closely monitoring the performance of GLD in the coming days. Even though investors have not shown much interest in gold lately, we are still bullish on the shiny stuff in the intermediate to long-term, just as long as it holds above its 200-day MA:

On the longer-term weekly chart, shown below, you'll see GLD has also come into a major area of prior horizontal price support. The key support of the 200-day MA, combined with the prior lows from mid-2008, make a long-term buy entry into GLD attractive. In the short-term, however, it could remain choppy:

One week ago, in the April 13 issue of The Wagner Daily, we illustrated that both the S&P 500 and Dow Jones Industrial Average were approaching major resistance of their late January and early February 2009 highs. We also said we expected the indexes to test those resistance levels sometime last week. Though the Dow is still several percent away from its February highs, the S&P 500 indeed bumped into resistance of its February high last Friday. This is shown on the daily chart below:

If you've been absent from the long side of the market, it's understandable to feel left behind by the market's recent strength. However, after six straight weeks of gains in the major indices, this is not the time to be chasing stocks and ETFs. Instead, maintain a watchlist of strong long candidates you wish to buy on a pullback, then use the 20-day exponential moving averages as a rough guide for an area of entry. With the S&P 500 now kissing a major area of horizontal price resistance, traders have the perfect excuse to take some chips off the table, thereby triggering a pullback in the market.

If you're not willing to hold existing long positions through a pullback, be sure to maintain tight trailing stops. Setting stops just below support of the prior day's lows would make sense in this case. If you're sitting on stocks or ETFs that are trending well, and you wish to sit through a pullback in anticipation of another leg up, make certain your stops are wide enough to provide the proper "wiggle room" to sit through a normal, healthy price retracement. Of course, there is always the possibility the S&P 500 will ignore resistance of its late January/early February highs, and continue higher for another week. But strictly from a technical point of view, a price retracement or correction by time (consolidation) is likely.

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Open ETF positions:

Long - TAN, OIH, UGA, UDN
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 Trade Alerts are also sent via e-mail and/or mobile phone text message on as-needed basis.

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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's new book, Trading ETFs: Gaining An Edge With Technical Analysis, was published by Bloomberg Press in August, 2008. Wagner also 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 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.