Is It Time To Take Profits As The Market Gets Overextended? (SPY, DIA, IWM, QQQ, SOXL, IYZ, IYT, DVY)
Wall Street was smiling yesterday as stocks ripped higher and the Nasdaq (NASDAQ:QQQ) claimed an 11 year high. All five major indices posted impressive gains with the small-cap Russell 2000 (NYSEArca:IWM) leading the march higher. The small cap index rallied 2.2%. Both the Nasdaq and the S&P MidCap 400 tacked on 1.6% while S&P 500 (NYSEArca:SPY) surged 1.5%. The Dow Jones Industrial Average (NYSEArca:DIA) couldn’t keep up with the hot pace of the other indices but still managed a 1.2% gain. Sectors showing the most strength included solar energy, real estate, software, internet, oil services, networking and banking. Precious metal, healthcare and pharmaceuticals all underperformed.
Internals ended the week on a bullish note. Volume surged by 12.4% on the Nasdaq and 13.2% on the NYSE. Advancing volume easily overpowered declining volume by 6.1 to 1 on the NYSE and 5.1 to 1 on the Nasdaq. The confluence of price action and market internals on Friday makes a clear case for institutional buying. Consequently, we see Friday as a clear sign of bullish accumulation for the broad market.
Given Friday’s strong breakout price action it is probably a good time to review key resistance levels. Last week we stated that we felt the market appeared likely to rally and overcut last summer’s highs. Below are charts of the Nasdaq, S&P 500 and DJIA. As you will notice, we are now at or near key resistance levels on all three indices. It is impressive that the Nasdaq set a fresh 11 year high on Friday but it is also important to note that none of the other major indices can make the same claim, and are still below key resistance. Since we are close to testing and/or overcutting key resistance levels we know it’s important to exercise caution and only take on the strongest potential long entries.
Last Friday, we followed this plan by selling both (NYSEArca:SOXL) and (NYSEArca:IYZ), locking in solid gains of 11% and 4% respectively. We remain positioned in (NYSEArca:IYT) and (NYSEArca:DVY) and still have (NYSEArca:PPH) on the watchlist as a long candidate. There is little question that the market is quickly reaching severe near-term overbought levels, as are many ETFs. This is what is driving our desire to sell into strength. By no means are we suggesting that we’re bearish on the market; rather, the likelihood is growing that this phase of the bull market rally may be approaching a level that is unsustainable in the near-term.
The commentary above is an abbreviated version of our daily ETF trading newsletter, The Wagner Daily. Subscribers to the full version receive specific ETF trade setups with detailed trigger, stop, and target prices, as well as daily updates on all open positions. Intraday Trade Alerts are also sent via e-mail and/or text message, on as-needed basis. For your free 1-month trial to the full version of The Wagner Daily, or to learn about our other services, please visit morpheustrading.com.
Deron Wagner is the Founder and Head Portfolio Manager of Morpheus Trading Group, a capital management and trader education firm launched in 2001. Wagner is the author of the best-selling book, Trading ETFs: Gaining An Edge With Technical Analysis (Bloomberg Press, August 2008), and also appears in the popular DVD video, Sector Trading Strategies (Marketplace Books, June 2002). He is also 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. Wagner is a frequent guest speaker at various trading and financial conferences around the world, and can be reached by sending e-mail to: email@example.com.