Broad Market Analysis - Chinese ETFs enter correction mode
Stocks kicked off the holiday-shortened week with an indecisive session that eventually settled modestly higher. The S&P 500 rose above last Friday's high in the morning, reversed into negative territory just after mid-day, then rallied off its low later in the afternoon. The other broad-based stock market indices followed a similar intraday pattern, though the Nasdaq showed a bit more relative strength. The Nasdaq Composite rallied 0.6%, the S&P 500 advanced 0.2%, and the Dow Jones Industrial Average eked out a gain of 0.1%. The small-cap Russell 2000 and S&P Midcap 400 indices were higher by 0.9% and 0.6% respectively. All the major indices finished slightly above the middle of their intraday ranges, confirming indecision all the way into the close.
Turnover rose above last Friday's light pre-holiday levels, but volume in both exchanges remained well below average. Total volume in the NYSE was 15% higher than the previous day's level, while volume in the Nasdaq increased by 10%. The broad-based gains on higher volume technically caused both the S&P and Nasdaq to register bullish "accumulation days." However, it's misleading to label the session as one of institutional buying considering that volume in both the NYSE and Nasdaq came in significantly below the 50-day average levels. Market internals were also not that impressive. Advancing volume in the Nasdaq rivaled declining volume by a margin of 2 to 1, but the NYSE ratio was positive by only 1.3 to 1.
In the May 23 issue of The Wagner Daily, we illustrated how the Biotech Index ($BTK) was beginning to show relative strength and setting up for a resumption of its primary uptrend. We still feel that is the case, as the index dipped back below its 20-day EMA on May 24, but quickly snapped back above it yesterday. The ability of it to recover from such a shakeout tells us that a short to intermediate-term bottom may be put in. As you can see on the daily chart, the $BTK will break out above its five-week downtrend line if it closes above yesterday's high. An even safer entry that provides more price confirmation is over the May 23 high of 824:
For a complete list of ETFs that are correlated to the Biotech sector, please download and view the free Morpheus ETF Roundup. As we mentioned last week, the Biotech HOLDR (BBH) should be avoided because of its relative weakness. Instead, consider the First Trust Biotech (FBT), which has a chart pattern that more closely mirrors the actual $BTK Index. Regular subscribers should note our trigger, target, and stop prices for the FBT setup below. The StreetTRACKS Biotech SPDR (XBI) is also one of the better looking ETFs in the sector.
As of the middle of China's trading session, around midnight EDT, the Shanghai Index is trading more than 6% lower. Given the strong gains the index has recently racked up, it's not a disaster, but the performance in the final half of the session is yet to be seen. As you might recall, we sold short the iShares Xinhua China 25 Index (FXI) on May 25 because it failed its mid-May breakout, then broke support of its daily uptrend line and 20-day EMA on May 24. So far, our short entry is working out well. We liked the entry on May 25 because the bounce into resistance of its 20-day EMA provided us with a positive risk/reward ratio for the setup. After failing to move back above its 20-day EMA, FXI subsequently sold-off yesterday. We've circled new resistance of the 20-day EMA on the daily chart below:
Today, the big question is whether or not FXI will hold above its 50-day MA. Given the overnight action in China, it's likely FXI will firmly gap down below it. If it does, overhead supply from the recent failed breakout should add to the selling pressure. Below its 50-day MA, next support is the May 1 low, around $105. If that level fails to hold, the bottom of the gap from February 27 should provide greater support, around the $100 level. We're presently showing an unrealized gain of 1.2 points on the FXI short position, with a downside price target of another 10 points ($100.30). For your information, the PowerShares Golden Dragon China Index (PGJ) is a less expensive alternative, though its underlying stocks are not the same as those of FXI.
As for the broad market, keep an eye on whether or not the S&P 500 holds above its 20-day EMA. It bounced off its support on May 25, then tacked on an additional modest gain yesterday, but still has recovered only half of the range from its May 24 loss. More importantly, the recovery attempt has occurred on very feeble volume. Nevertheless, the S&P could certainly continue to hold above its 20-day EMA, just as it has done for the past several months. If it does, we will buy relatively strong sectors such as Biotech and others. It really doesn't matter to us whether the S&P holds and resumes its uptrend, or enters into a short to intermediate-term correction from here. We're prepared either way, and we wish our subscribers to be as well.
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In this column, MTG presents you with a FREE, actual trade setup that we are stalking for entry at some point during the week. Note that, unlike the daily guidance that regular Stalk Sheet subscribers receive, this free Stalk of the Week does not take into account overall broad market conditions that can easily affect the trade over the next several days. This week's setup is:
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Below is the weekly commentary that accompanied this week's updated ETF Trend Tracker that was e-mailed to subscribers at the beginning of the week. The Morpheus ETF Trend Tracker, a perfect supplement to the ETF Roundup guide, is a comprehensive table of Exchange Traded Funds (ETFs) designed for informed investors and longer-term traders who prefer to hold their ETF positions for a few weeks to several months at a time. Based exclusively on a weekly analysis of trendlines on the daily and weekly charts, the ETF Trend Tracker provides subscribers with a thorough snapshot of the primary trend direction of ETFs in every category from broad-based to industry sector to international. This information is e-mailed to subscribers weekly, in a user-friendly format that groups ETFs based on the direction of their primary trends.
Commentary:The Market Segments took a break and faded lower for the week. Several ETFs dropped far enough to break through their respective ascending trend channel support. Trading below the lower trend channel is a significant event and can be used to justify scaling out of a position or even placing a new short position if you are a more aggressive trader. MTG has also raised stops strategically to allow for volatility and also, at times, to maximize gains. The Dow Dividend ETF (DVY) fell victim to last week's weakness and is the first in the "descending trend" list. It would not be surprising if at least three more hit their reversal triggers next week.
Telecom (IYZ) and Wireless (WMH) gapped up and stayed higher even when other sector weakened. That is a good sign of relative strength. Consumer Staples (XLP) trended lower and is forming a double top. The MTG Stop (S1) is placed right at the neckline. A double top has positively formed, by two swing high (lower high) formations, in another sector also. It is one of the better-formed chart patterns that may have us abandon the bullish bias right now! It has an excellent reward to risk ratio (counter trend short trade) to boot. Find which ticker it is in the updated ETF Trend Tracker report chart commentary. When you find it, you may use the S1 as the entry trigger. Grinding lower are Euro Currency (FXE) and Gold (GLD). GLD looks bad enough for us to place the Reversal Stop (S2) near current price. Gold actually formed and then traded below a newly formed swing low within the week.
Bond ETFs trended lower the whole week, and the benchmark mid-term bonds (IEF) is now in the "descending trend" list. The Corporate (LQD) and short-term bonds (SHY) will soon be next. However, their reversal stop levels are placed at relatively firm support levels.
Australia (EWA) landed in the "descending trend" list last week, as anticipated by our tight placement of the reversal stop. We found several International ETFs trading below their ascending trend channels and have hit their MTG Stops (S1). European ETFs such as Germany (EWG) has held up well. EWG currently post a gain of over 11% from our March 2007 entry, but is eclipsed by gains from Brazil (EWZ) of over 22% on the same month.
Alert of imminent reversal to the upside:Click to receive your free 1-month trial to the ETF Trend Tracker (limit one free trial per household), which will be e-mailed to you every week, along with intra-week updates on an as-needed basis.