The Trader Daily

 | Jul 21, 2014 | 7:30 AM EDT
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After last Thursday's greater than 1% decline in the S&P 500, Friday's Trader Daily opened with a chart of the four major market ETFs to remind everyone (myself included) that aside from the iShares Russell 2000 ETF (IWM), the bulls were still in control on virtually every timeframe. Fast forward to Friday's close and it's easy to see that anyone caught selling in the hole (selling into weakness) on Thursday lived to regret that decision. The bottom line is that as long as the major averages remain in intermediate and long-term uptrends, selling into weakness will remain a near impossible strategy to implement.

Unfortunately for the shorter-term momentum trader, buying upside breakouts over the past six-plus weeks on the major averages has also been a frustrating strategy.

Take the SPDR S&P 500 Trust (SPY) for example. After its late-May to early-June rally from $189 to $196, the SPY broke out to new highs on June 18, only to drift back down toward its 21-day moving average over the subsequent five-plus sessions. A similar situation unfolded on July 1, with the SPY closing at a new all-time high, but then failing to gain much additional ground over the subsequent two weeks. Whether you choose to label this choppy and inconsistent action a time-based correction or a topping process, there's no question this is a difficult environment to trade in. 

We're essentially left with a situation where upside momentum is waning, but selling into weakness is a recipe for disaster. In my view, short and intermediate-term index traders have little choice but to identify more meaningful pivot points (swing lows), then buy dips toward short term moving averages and trend lines with the intent of liquidating said positions in relatively short order.

As you review the chart below of the four major market ETFs, please note that while the IWM is still in an immediate term downtrend, the short term stochastic is registering a bullish divergence. A close above $115.35 could quickly result in a return toward 118.40 (the top of its mid-June consolidation).

As far as the SPY and PowerShares QQQ Trust (QQQ) are concerned, the 21-day moving average and short-term trend lines are our most immediate reference points.


Four Major ETFs (SPY, DIA, QQQ, IWM)
Source: eSignal


A number of traders have been chatting up the recent dislocation between the iShares iBoxx High Yield Corporate Bond Fund (HYG) and the SPY. I don't want to make too big a deal out of the recent weakness in HYG, but even a charting tourist can spot the generally strong correlation between the two ETFs. Caution is clearly warranted on the part of short term, aggressive SPY buyers. But initiating a trade based solely on this dislocation appears premature.


iShares iBoxx High Yield Corporate Bond Fund (HYG) and SPDR S&P 500 Trust (SPY)
Source: eSignal


A more concerning chart to me than the one above is the ratio of the iShares Barclays 20+ Year Treasury Bond Fund (TLT) to HYG. Equity bulls prefer an environment where risk is viewed favorably. But when the TLT begins to outperform the HYG, quite the opposite is taking place.

As a ratio, the TLT began gaining ground against the HYG at the end of 2013. The gains haven't been particularly eye-catching. But over the past five years, any time traders flock to the safety of the TLT over the more aggressive and riskier HYG, we tend to see equities weaken. Similar to the chart of HYG and SPY above, equity bulls should view the weekly ratio chart of the TLT:HYG as a warning sign.


Weekly Ratio TLT: HYG
Source: eSignal


Any trading or volume profile related questions can be posted in the comments section below, emailed to me at or posted to my twitter feed @ByrneRWS



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