Table of Contents


• Broad Market Analysis - Where will the S&P and Nasdaq find major support?
• MTG Stalk of the Week - CRM long
• ETF Trend Tracker weekly commentary

After an impressive rally throughout all of February, of which we participated with a few short-term trades in The Wagner Daily, the various commodity ETFs formed bearish reversal bars on March 4. As commodities clearly remain the strongest group in the stock market, we would have actually welcomed a near-term correction to provide us with low-risk re-entry levels, but they took off again yesterday. Commodity-based ETFs that zoomed to new all-time highs yesterday include: U.S. Oil Fund (USO), DB Commodity Index Fund (DBC), StreetTRACKS Gold Trust (GLD), and iShares Silver Trust (SLV). The U.S. Natural Gas Fund (UNG) also moved to a new high within its current uptrend, but is still below its 52-week high.

In the February 28, 2008 issue of The Wagner Daily, we pointed out the relative strength that Silver (SLV) began showing over Gold (GLD) just a few days earlier. We then suggested that its relative strength meant SLV would provide more future profit potential, along with less risk during a pullback. One week later, let's take an updated comparative look at SLV versus GLD. The overlay chart below compares the percentage changes of SLV and GLD over the past ten days:

The black vertical line on the chart above marks the closing prices of SLV and GLD when we first pointed out the divergence and relative strength of SLV in our February 28 commentary. The divergence started to become clear on February 22, and SLV then went on to outperform GLD by more than 6% in the days that followed (7.8% vs. 1.6%). The beauty of relative strength trading is that divergent trends usually remain that way for many weeks, or even months. That's why we suggested that, between the two ETFs, SLV was likely to gain more than GLD in the days and weeks that followed. Now, one week later, notice that SLV has outperformed GLD by more than 11% over the past ten days.

More importantly than the outperformance on the upside, the chart above is also a good example of how ETFs with relative strength pull back less when the general market does. On March 4, notice that SLV only corrected down to support of its February 28 and 29 lows. Conversely, GLD dropped below support of those lows on March 4. Because it dropped less during the pullback, it was much easier for SLV to shoot firmly to a new high yesterday. We analyze the chart above not to "toot our own horn," but as a great educational example of the importance of always buying the ETF with the most relative strength within the sector. This style of relative strength ETF trading is discussed thoroughly in my upcoming book, scheduled to be published by Bloomberg Press on July 1 of this year.

If one only looked at the recent performance of commodity, energy, and mining ETFs, one could be forgiven for thinking we're in a raging bull market. However, the reality is that a majority of the major industry sectors are consolidating near their recent lows, perilously close to losing key support. It's obvious that financial stocks have gotten hammered, but sectors such as retail are also looking pretty heavy. Check out the daily chart of the Retail HOLDRS (RTH):

For the past five weeks, RTH has been stuck in a choppy, sideways range. Right now, this chart is nothing we would touch on the long or short side. But if RTH breaks below the March 3 low (illustrated by the dashed horizontal line above), we will probably enter a short position. With convergence of the 20 and 50-day moving averages pressing down on RTH, there's a good chance that will happen. Looking at the longer-term weekly chart, one will also notice that RTH has also been in a primary long-term downtrend since July of 2007. Therefore, odds favor a resumption of the well-established downtrend until the market proves otherwise. Just remember to patiently wait for the proper trigger price, as it is dangerous to "jump the gun" for an early short entry before the actual break of support.

Forming a similar chart pattern as the retail sector, real estate is also poised to make another leg down. Notice the similarities on the chart of the iShares U.S. Real Estate Index (IYR):

As with RTH, we are simply looking for a break of key horizontal price support to initiate a short position in the real estate sector. However, we plan to buy the inversely correlated UltraShort Real Estate ProShares (SRS) if it breaks out above its recent range instead.

Stocks and ETFs at new 52-week highs usually accumulate impressive gains before pulling back. This is simply due to the lack of overhead resistance levels. If traders and investors stuck at higher prices are not selling into strength every time the market moves higher, it doesn't require a lot of buying pressure for stock and ETFs at new highs to continue higher. This is why, at least in a bull market, we prefer buying breakouts to new highs. Not surprisingly, the inverse is also true of stocks, ETFs, and indexes at new 52-week lows. Since the Nasdaq failed to immediately snap back from last Friday's breakdown to a new 52-week low, one must assume last week's key break of support was for real.

Devoid of significant support levels where traders and investors are inclined to step up to the plate, downside momentum in new lows can often become quite substantial before the bulls finally return. The Nasdaq set a new 52-week closing low several times this week, while the S&P and Dow are perilously close to breaking down as well. With the major indices now testing their January lows, it's a good idea to know the "big picture" of where they might find their next major support levels. For this, one of the most reliable techniques is to apply Fibonacci retracement lines to the long-term monthly charts. We have removed the usual moving averages from the following monthly chart of the Nasdaq to more easily see the Fibonacci retracement levels:

Circled in blue, notice how the Nasdaq's January low (on an intraday basis) perfectly coincided with a 38.2% Fibonacci retracement from the October 2002 low to the October 2007 high. Especially on the long-term chart intervals, stocks and indexes frequently attempt to reverse after the initial test of the 38.2% retracement level. Though the Nasdaq is trading at a new low on a closing basis, but the January intraday low is technically still a valid support level, especially since it coincides with a 38.2% retracement.

If the Nasdaq slices through its intraday lows from January, the next stop is the 50% retracement, around the 1,985 level. Circled in pink, notice how the low of July 2006 coincides with this 50% level. This is not coincidence, as the magic of Fibonacci retracements is that they often line up with prior significant areas of price support or resistance. When there is convergence of a Fibonacci level and a prior low, the support becomes even stronger. Taking it a step further, the low of August 2004 nicely aligns with the 61.8% Fibonacci retracement at 1,778. Because of this convergence at all levels, we believe these are the "big picture" levels of price support to watch in the Nasdaq: 2,191, 1,985, and 1,778. You may want to set alerts on your trading software to notify you of a test of these levels, as they represent good prices to cover any short positions and/or dip a toe in the water on the buy side.

In case you're not yet impressed with the convergence of price support and Fibonacci retracement levels in the Nasdaq, you may find it interesting that we have essentially the same technical picture in the S&P 500. As per the monthly chart below, 1,267, 1,172, and 1,077 should act as major support levels in the S&P:

It's looking more and more like a test of the 50% retracement levels is going to happen, but that doesn't mean there won't be some violent short squeezes and counter-trend retracements along the way. There are sufficient opportunities for profitable trading out there, but the two keys are to reduce your share size and utilize a shorter-than usual time horizon on all trades. The less time in the market, the less overall risk.

In yesterday's Wagner Daily, we said of the broad market that, "Frankly, cash is the best position until either one of two scenarios occurs: the major indices close firmly above their 20-day EMAs or they close below yesterday's (March 4) lows. . .For the S&P 500, yesterday's (March 4) low is 1,307 and the 20-day EMA is at 1,353. For the Dow, the levels are 12,032 and 12,420. The Nasdaq Composite's low is 2,221 and the 20-day EMA is at 2,320." Since yesterday's gains were not strong enough to even test the 20-day EMAs, our view of the broad market remains the same going into today. Select industry sectors we've been discussing can be momentum traded in the short-term, but stay away from the broad-based ETFs until they "make it or break it."

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: