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Deron Wagner is the founder and portfolio manager of Morpheus Trading Group. His daily focus is managing and trading the Morpheus Capital Hedge Fund, which he founded in April of 2004. He also teaches his swing trading strategy with The Wagner Daily newsletter, which provides exact entry, exit,... More
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Morpheus Trading Group
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Morpheus Trading Group - swing trading blog
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Advanced Technical Analysis of ETFs
  • Should You Be Concerned About Yesterday's Stock Market Selloff? Here's Our Take... 0 comments
    Sep 26, 2012 7:58 AM | about stocks: QQQ, SPY, DIA, IWM, MDY

    Although most traditional long-term investors were probably not pleased by yesterday's sell-off in the S&P, Nasdaq, and Dow, we view the September 25 pullback as positive because technical analysis indicates the main stock market indexes were due for a significant correction. Whenever stocks start trading too far above their 20-day moving averages for too long a period of time, the reward to risk ratio of new swing trade entries becomes diminished. However, once the inevitable stock market pullback finally comes, it creates new, lower risk buying opportunities for new stock and ETF trading entries within the existing uptrend.

    Given yesterday's broad-based stock market decline, now is a good time to take an updated look at the daily chart patterns of ETFs that track the most popular stock market indexes, in order to see where the next support or resistance levels may be found. Let's start with a look at the S&P 500 SPDR ($SPY), a popular ETF proxy for the benchmark S&P 500 Index. This is followed by daily charts of the Nasdaq 100 ETF ($QQQ) and Dow Jones DIAMONDS ($DIA):

    (click to enlarge)$SPY tests its 20-day moving average (click to enlarge)$QQQ dips below both its 20-day MA and support of its breakout level (click to enlarge)$DIA still holding above its 20-day MA

    On the surface, yesterday's (September 25) sell-off may have seemed severe. However, in context with the strength of the recent rally, notice on the charts above that not a lot of technical damage has been done. $SPY closed just below near-term support of its 20-day exponential moving average (the beige line), while $DIA is still holding above it. $QQQ looks a bit worse because it is closed below both its 20-day exponential moving average and horizontal price support of its prior highs. However, the Nasdaq 100 Index was also showing relative strength on the way up.

    For now, it's too early to tell whether or not bearish momentum will build on yesterday's decline. Given that it was the first "distribution day" (higher volume selling) in recent weeks, there is not yet any indication of significant danger in the near-term. Even if stocks continue lower over the next several days, much more significant support of the 50-day moving averages (the teal lines on the chart patterns above) should halt the decline.

    More so than actual price action, will be closely monitoring subsequent volume patterns for any further instances of institutional selling (distribution days). Until that happens, our rule-based system of market timing mandates that we view the current pullback as an ETF and stock buying opportunity, rather than the time to exit long positions and go to cash or sell short. Nevertheless, we are not interested in taking on additional long exposure until the market confirms yesterday's selling will be short-lived and subsequently lead to a resumption of the dominant uptrend of the past several months.

    Remember that we are NOT in the business of making stock market predictions; rather, we merely react and take action in tangent with what the market gives us. As always, subscribers to our trading newsletter will be immediately notified if there are any changes to our current market timing mode.

    The commentary above is a shortened version of the September 26 issue of Wagner Daily, our ETF trading newsletter, which also includes swing trading stock picks. Subscribers to the full version receive our top nightly ETF and stock picks with preset entry and exit prices, access to our trading strategy, market timing system, and technical ETF and stock screener software, which you can try for free.

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