Since the Nasdaq rallied today, some of the commentary below may seem like hindsight, but it was actually sent to subscribers of The Wagner Daily before the market opened today. Because the content is still relevant and educational, we are re-printing it for this week's Wagner Weekly. Enjoy!
Weak action throughout most of yesterday's session shook out a lot of bulls, but a wave of buying in the final hour lessened the bearish tone. The Nasdaq Composite shed 1.1%, the S&P 500 0.8%, and the Dow Jones Industrial Average 0.4%. Small and mid-cap stocks that have showed significant relative strength in recent weeks finally pulled back. The Russell 2000 and S&P Midcap 400 indices were lower by 1.9% and 1.6% respectively. Each of the main stock market indexes closed in the bottom third of their intraday lows, but off their worst levels of the session.
Total volume in the Nasdaq increased 12% above the previous day's level, but turnover in the NYSE rose by only 1%. The Nasdaq's loss on higher volume was a "distribution day," indicative of institutional selling. However, most leading stocks dropped only moderately. A few even ignored the broad market weakness and powered higher, a positive sign for the overall market. Market internals were negative, but not that ugly. Declining volume in the Nasdaq exceeded advancing volume by a margin of just under 3 to 1. The NYSE ratio was negative by less than 4 to 1.
The downtrend that persisted throughout most of the day caused the S&P and Nasdaq to fall below support of their ranges of consolidation that had formed over the preceding five sessions. This undoubtedly triggered many traders' protective stop orders that were set below the recent trading ranges. Both the iShares Transportation (IYT) and iPath India Index (INP) hit our trailing stops, but the losses were minimal because we had raised the stop levels to just below our entry prices.
On the surface, yesterday's session might quickly be interpreted as negative, but a closer look at the technicals reveals a different paradigm. At its intraday low, the Nasdaq Composite touched support of its 20-day exponential moving average. The S&P and Dow similarly came within close proximity of their 20-day EMAs. The late-day rally subsequently enabled all the major indices to close at support of their uptrend lines that began with the March 17 lows. Further, the indexes also finished at or very near support of their 10-day moving averages. In steady uptrends, a touch of the 10-day MA often provides the impetus for stocks to resume their upward momentum. This confluence of support is shown on the daily chart of the S&P 500 below:
On the chart above, notice how the S&P bounced off support of its four-week uptrend line. The Dow did the same, while the Nasdaq basically closed right on its uptrend line. The S&P settled right at support of its 10-day MA (the dashed purple line). When the index pulled back at the end of March, it closed below its 10-day MA on March 28, quickly moved back up on March 31, then ripped to a new near-term high on April 1. The 10-day MA often has this effect in developing trends. This time around, the pullback to the 10-day MA is even better because both the 20 and 50-day MAs are below the current price of the S&P. When the S&P touched its 10-day MA in late March, the index still had to deal with overhead resistance of both its 20 and 50-day MAs. Conversely, both moving averages are now acting as support, right in the vicinity of the four-week uptrend line. It's also the same positive scenario with the Dow and Nasdaq.
Despite the fact we closed two open positions yesterday, we felt the S&P and Nasdaq's pullback to their uptrend lines and 10-day MAs provided a low-risk buying opportunity for select ETFs. As such, we bought the Ultra QQQ ProShares (QLD) when it approached support of its 20-day EMA. It subsequently closed a bit above our entry price. The shorter-term intraday chart shows how QLD reversed to close above resistance of its hourly downtrend line. This should set a bullish tone going into today's session:
In addition to buying QLD via Intraday Trade Alert to subscribers, we also re-entered the iShares Xinhua China 25 (FXI) as it retraced to support of its 50-day MA. Recall that we sold FXI into strength on April 7, netting a 6.6 point gain. In the following day's Wagner Daily, we said of FXI, "Although we only entered the trade on April 2, we made a judgment call to take profit because we are not interested in holding through a correction. Since it has rallied more than 20% off its low in just two weeks, a pullback is likely in the near-term. After it consolidates or pulls back, we can simply re-enter FXI if it still looks good." As anticipated, the correction began the following day. Discipline to sell into strength and patiently wait for yesterday's decent pullback enabled us to buy back into FXI near our original April 2 entry price. The big benefit is we have already secured a gain of nearly 7 points in the process.
One might argue that buying yesterday's pullback was "risky," but the plethora of support levels made it a well-defined risk with a positive risk/reward ratio. In this business, taking precisely calculated risks is what we get paid for! Traders who continually wait until risk seems non-existent are usually too late to the party and frequently call a market top. With many of the "weak hands" now washed out of the broad market, there is less overhead supply for stocks to contend with if a rally attempt comes today or tomorrow. Put another way, traders who were looking for a good excuse to sell their long positions have now done so. Therefore, less buying volume is required to push the major indices to new recent highs. Remember that quick "shakeouts" below obvious levels of support can be bullish, just as long as they're quickly followed up with higher volume rallies. Long-term trends remain bearish, but the market has yet to prove the new intermediate-term uptrends are dead.
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.
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At the New York Traders Expo in February 2008, Morpheus Trading Group's Founder and Portfolio Manager, Deron Wagner, was interviewed regarding his thoughts on two different types of ETFs. We provided a link to the first interview on non-correlated ETFs several weeks ago. Now, the second interview, regarding inversely correlated ETFs, has been released. Produced by MoneyShow.com, the live video interview can be viewed by clicking here. The video is just over 3 minutes in length, so please take a look. To view Wagner's interview on non-correlated ETFs, click here. If you missed Wagner's February presentation at the New York Traders Expo, don't fret. We're pleased to announce that Wagner has been invited to speak at the upcoming Los Angeles Traders Expo from June 18 - 21, 2008. Click here for details of this and other upcoming events. We look forward to meeting you at our next event in California! |
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:
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 bulls dominated the scene last week, as a broad-based rally pushed many of the Market Segment ETFs above key intermediate-term resistance levels. The rally above prior "swing highs" enabled more ETFs to move into the "ascending trend" list. Check out this week's updated ETF Trend Tracker to review the updated list. Remember that new entries into the "ascending trend" list can be quickly identified by finding rows shaded in pink color. Also, keep a close watch on updated Reversal stops of ETFs still in the "descending trend" list, as more bullish reversals could occur in the coming week. Clicking on the ticker symbols enables you to review our annotated charts. This is a quick way to see how near the Reversal Stops are to current price levels. The Nasdaq 100 (QQQQ), the first ETF to reverse to the "ascending trend" list and leader of the broad-based rally, is already showing a 5% gain since its bullish trigger.
Within the industry sectors, numerous ETFs hit their Reversal Stops, enabling them to move to the "ascending trend" list. Among them, only the Retail (RTH) sector subsequently faded a bit, but others held their gains well. By observing which sectors have reversed their trends, one can gain insight on which industries are helping the broad market turn bullish. As mentioned numerous times in The Wagner Daily, we are now in an overall intermediate-term uptrend, but the long-term trends are still bearish. Carefully review this week's charts for updated MTG Stops and Reversal Stops. The only ETFs to move to the "descending trend" list were the Ultrashort ETFs and precious metals, Gold (GLD) and Silver (SLV). Energy-related ETFs formed lower "swing highs," but have been very choppy week to week.
The Bond market was mixed again. Corporate Bonds (LQD) edged higher, while the Short term Bonds (SHY) dipped lower. The remaining fixed-income bond ETFs were nearly unchanged.
The International markets also rallied, as more ETFs triggered into the "ascending trend" list. The Latin American ETFs, including Brazil (EWZ) and Mexico (EWW), are poised to rally. EWW broke above some resistance levels, but will need to overcome more resistance levels to reach new highs. Again, more ETFs are in the "ascending trend" list this week, which supports the overall bullish bias.
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.