On Thursday, the markets completed a second consecutive day meandering in a tight trading range. All of the major indices struggled to close about flat for the day. The Dow Jones Industrial Average, S&P 500 and the small cap Russell 2000 all closed down 0.2%. The S&P MidCap 400 closed down, but only lost 0.1% in Thursday's trading. The Nasdaq was the only major index to advance, as it eked out an increase of 0.1%. The range-bound price activity witnessed over the past two trading days is not uncommon, following a strong rally as witnessed on Tuesday. The market appears to be "catching its breath" before attempting another push to higher ground. In a day of mixed trading, the strongest sectors were Consumer Discretionary, Healthcare and Utilities. The weakest sectors on Thursday were Materials, Energy and Financials. As discussed earlier this week, we are keeping a close eye on the financial sector, as its next move could hold the key to another advance.

Turnover dropped on both the NYSE and Nasdaq. Nasdaq volume was off 12%, while volume on NYSE fell by 5.0% on the day. On the Nasdaq, advancing volume outpaced declining volume by a ratio of 1.9 to 1. On the NYSE, declining volume edged out advancing volume by a factor of 1.4 to 1. Thursday's internals provide another indication that the market is consolidating for another rally.

As noted in the September 21 newsletter, the iShares Dow Jones US Medical Devices Index (IHI) has been lagging the current market rally. To date, divergence from the broad market continues for this ETF. Although IHI has been consolidating, it has still been unable to challenge the 200-day simple moving average. Below is a comparison of September 21 versus yesterday's trading action in IHI. Again, with the next correction in the market, IHI should present a good shorting opportunity.













The iShares ESCI Sweden Index Fund (EWD) is setting up for a potential long entry. For the past 6 days, it has been consolidating at the 12-month highs. EWD is seeing increased volume, as it has already traded 1/3 of September's volume in the first 5 trading days of this month. A burst above Thursday's high of 29.48 should carry this ETF to the May 2008 high of $33.42. EWD would also be a potential long play on a pullback that fills the gap formed between October 4 and 5. This gap corresponds closely to the uptrending 20-day exponential moving average. If the gap is filled, it would not be unexpected to see EWD "cut" just below the 20-day EMA, sweep the stops, and reverse to continue the rally.



 

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and MorpheusTrading.com, a trader education firm.