Stocks jumped out of the gate yesterday and did not look back in what was a strong morning session that saw most averages up 1.0% or more by 12 pm. Although the averages did not extend higher in the afternoon session they were able to digest gains and rally in to the close to finish at the highs of the day. Much like Monday's performance, the percent gains were in a tight range across the board with the Nasdaq Composite leading the way at 1.2%. The S&P Midcap 400 Index ($MID) was right behind at 1.1%. Both the S&P 500 Index ($SPX) and Dow Jones Industrial Average ($DJIA) closed up 1.0%. The The small-cap Russell 2000 Index ($RUT) added 0.9%. All the major averages closed in the top 5% of the day's range.
While Spain and Greece were very much the focal point of Wall Street for Q1-Q2 of 2012, the price action in the iShares MSCI Spain Index (EWP) is quietly making a nice comeback. After a strong rally off the summer low which broke the weekly downtrend line, $EWP stalled out at resistance around $30.00. A breakout above $30.00 should find resistance at a weekly downtrend line around $35.00.
Dropping down to a daily chart we see that the short-term downtrend line has been broken, which means that $EWP should now form the right hand side of the base and continue to set higher swing lows above the 50-day MA. $EWP has yet to form a low risk buy point so we will just continue to monitor the action for now.
The financial sector is also forming a bullish consolidation pattern above the 50-day MA. The daily chart of the Financial Select Sector SPDR ($XLF) is in pretty good shape and showing a bit of relative strength the past few weeks. $XLF has set a higher swing low while the S&P 500 undercut the prior swing low and the 50-day MA. We look for the price action to tighten up over the next week or two to provide us with a low risk entry point.
The weekly chart of $XLF shows clear resistance at $17.00, which would be an easy target for a breakout trade if/when it triggers.
So far the market has put in a solid reversal day and a strong follow-through day off the lows. However, the big question here is will the Nasdaq and the small cap Russell 2000 act as a drag on the market. Both of these averages showed relative weakness to the S&P 500 by breaking a prior swing low and have more resistance to clear before getting back on track.
Deron Wagneris the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, andMorpheusTrading.com, a trader education firm.
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