Broad Market Analysis - Currency and Interational ETF setups
The Nasdaq closed at a six-year high for the third consecutive day, but the S&P and Dow merely spun their wheels. After opening flat, stocks drifted lower throughout the morning, then reversed higher in the afternoon. The Nasdaq Composite cruised 0.4% higher, while the S&P 500, Dow Jones Industrial Average, and S&P Midcap 400 each finished unchanged. The tech-heavy Nasdaq 100 Index zoomed 0.8%, faring twice as well as its broader-based brother. The small-cap Russell 2000 gained 0.2%. Each of the major indices finished a tad below their intraday highs. For the S&P and Dow, that was just where they started the day.
Volume obviously rose well above that of the previous day's shortened session. Total volume in the NYSE increased 80% above the prior day's level, while volume in the Nasdaq registered 56% higher. As the preceding session closed three hours early, such a substantial increase was no great feat. In fact, Nasdaq volume was even lighter than Monday's pre-holiday level. Turnover in both exchanges came in below the respective 50-day average levels. Apparently, many traders have not yet returned to their desks. As such, we may need to wait until next Monday to see whether or not the market's light-volume, holiday gains are sustainable. Despite the Nasdaq's solid gain, advancing volume exceeded declining volume by less than 2 to 1. The NYSE volume ratio was flat. One positive, however, is that many market-leading stocks such as Apple (AAPL) and Research in Motion (RIMM) continued to power higher on decent volume.
Rather than analyzing the broad market's support and resistance levels again, let's take a look at a few lesser-known ETFs that may be stealthily setting up for upside breakouts. As the U.S. dollar has been weakening again, several of the currency ETFs have been forming bullish chart patterns. The CurrencyShares Euro Trust (FXE) recently broke out above its intermediate-term downtrend line and moved back above its 50-day MA. Since its long-term uptrend that began more than a year ago is still intact, FXE may be setting up for a breakout to new highs. The daily chart shows a tight-ranged bullish consolidation above its 50-day MA for the past three days. If it rallies above its July 2 high of $136.44, one might consider buying FXE:
Confirming the bullish reversal of the intermediate-term downtrend is the fact that FXE bounced perfectly off support of its long-term uptrend line. This is illustrated on the weekly chart below:
Within the same family of CurrencyShares ETF, the Canadian Dollar Trust (FXC) is setting up for a breakout to a new record high. The tight consolidation above the 20-day EMA is quite bullish, so we're stalking FXC for a potential long entry on a rally above its July 2 high of $95.02. Regular subscribers to The Wagner Daily should note the trigger, stop, and target prices that follow the commentary. The actual setup is illustrated on the chart below:
Although FXC trades with a low average daily volume, remember that liquidity is never an issue with ETFs. Unlike individual stocks, in which liquidity can greatly affect how a stock trades, all exchange traded funds are synthetic instruments. As such, the amount of average daily volume that an ETF trades is, for the most part, irrelevant. Even if a particular ETF had no buyers or sellers for several hours, the bid and ask prices would continue to move in correlation with the market value of the ETF that is derived from the prices of the underlying stocks. An ETF with a low average daily volume may sometimes have slightly wider spreads between the bid and ask prices, but you can simply use limit orders if this is the case. We trade for points, not pennies, so paying a few cents more on occasion is not a big deal.
While on the subject of foreign-correlated ETFs, the iShares Hong Kong Index (EWH) is another that is setting up for a substantial breakout. The iShares Xinhua China 25 (FXI), which tracks mainland China's equivalent of the Dow, has been on a tear for quite some time. However, day-to-day volatility in the Shanghai market may be beyond the comfort level of some investors and traders. If so, the more established and regulated Hong Kong market is another way one can participate in the Asian markets. With an average daily volume of 3 million shares per day, EWH is also traded heavily by institutions. Below is its weekly chart:
In May of this year, EWH briefly popped above its prior high from January (the dashed horizontal line), but the initial test of resistance failed. Rather than subsequently falling sharply, EWH retraced just a little, then consolidated in a tight range for five more weeks. This week, it moved back above resistance at $17.07 and is poised for a weekly close at a new high. The March shakeout down to its 40-week MA (and its 200-day MA) increases the odds this breakout attempt sticks. As such, we are looking for a potential long entry above yesterday's high.
In the domestic market, the Nasdaq 100 Index Tracking Stock (QQQQ) still looks good and is buyable on a pullback. Just be sure to place a protective stop not far below the breakout level of $47.87. Again, caution is recommended until we see the return of normal volume levels.
If you wish to learn about Morpheus Trading Group's ETF trade entries on the same day they occur, sign up for a free trial to The Wagner Daily or other MTG services by clicking here (limit one per household). Also, remember that all previously published issues of both The Wagner Daily and The Wagner Weekly are available in the MTG archives. If you are new to our services or wish to broaden your knowledge of ETF trading or our general trading style, we recommend you browse the archives because it is educational and free! Click here to visit the Wagner Daily archives or here to visit the Wagner Weekly archives.
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:
We closed last week's Stalk of the Week, WFR long, for a scratch. However, it is stabilizing above its pivot, so we may re-enter the position if it rallies again.
Click to receive your free 1-month trial to The MTG Stalk Sheet so that you can receive an average of one to three trade ideas such as this one on a daily basis (limit one free trial per household). Subscribers are always provided with detailed entry, stop, and target prices for each trade, and intraday e-mail alerts are sent as needed.
Below is the weekly commentary that accompanied the most recent ETF Trend Tracker, e-mailed to subscribers last weekend. 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 Segment ETFs continue to show divergence, as the S&P 500 remains stuck below its 50-day MA while the Nasdaq hovers near its multi-year high. It's been a tug-of-war between the relative strength of the Nasdaq and relative weakness in the S&P, but a winner may soon emerge. When the Market Segment ETFs are populated evenly between the ascending trend and descending trend lists, choppy action like stocks experienced last week is to be expected.
Most industry sectors continue to fall apart, and several more were added to the descending trend list this week. Some of these ETFs were on the ascending trend list for almost a year. Please review the latest ETF Trend Tracker report for updated information, clicking on the ticker symbols to view annotated charts. Noticeably weaker were Real Estate (IYR) and Biotech (BBH) industries, both of which closed the week near their lows. Conversely, the Wireless industry (WMH) closed the week at new highs, which helped to lift the QQQQ. Like the broad market, many industry sectors were mixed and nearly unchanged for the week.
The fixed-income (bond) ETFs rallied and closed near the week's highs. The bellwether mid-term bond (IEF) hit its MTG Stop (S1), but is still below the entry trigger. Remember that negative percentage changes for ETFs in the descending trend list are profitable short entries, since we anticipate the trends to continue lower.
Some International sectors edged low enough to land in the descending trend list, but quickly bounced. It was almost like a stop hunt, but more likely the result of a directionless market. Such chop was identified in Malaysia (EWM), which posted progressively lower lows and higher highs (left side of a diamond wedge formation) within a short duration. Such a pattern should be avoided while it is developing, but can be used to profit when the trend eventually settles in one direction.
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.