December 9, 2010
Stocks spent most of the day mired in indecisive trading yesterday, causing the major indices to close with mixed results on lighter volume. However, a spurt of buying in the final minutes of trading enabled three of the five major averages to finish in positive territory. The Nasdaq Composite and S&P 500 both advanced 0.4%, while the Dow Jones Industrial Average eked out a small gain of 0.1%. The small-cap Russell 2000 closed flat and the S&P MidCap 400 edged 0.1% lower. Overall, Wednesday's action was uneventful on a technical level.
After the previous day's wild volume surge, it is not surprising yesterday's session brought a decline in trade. Volume fell by 29% on the NYSE and 7.2% on the Nasdaq. Advancing volume slightly outpaced declining volume on both indices. The adv/dec volume ratio on the NYSE was positive by a margin of 1.4 to 1. On the Nasdaq, up volume exceeded down volume by a margin of 1.5 to 1. The lackluster internals were typical for a range-bound market.
The United States Natural Gas ETF (NYSEARCA:UNG) performed quite well yesterday, as it broke out above horizontal price resistance from last month's highs. With two "higher highs" and "higher lows" now in place on its daily chart, we are seeing more confirmation of the recent bullish trend reversal. Additionally, volume was up in this ETF by more than 50% day over day. The significant spike in volume suggests this ETF may be back on the institutional radar screen, and we remain long from our November 24 entry. As noted on the chart below, next stop appears to be key resistance of its 200-day moving average, presently at the $7.02 level:
Yesterday, we made a judgement call to exit our position in the Market Vectors Coal ETF (NYSEARCA:KOL), closing the trade with a small gain. While pullbacks from the highs are obviously normal in uptrending ETFs, we did not like the high volume that accompanied the sharp price retracement of the past two days. As such, we simply scratched the trade. Furthermore, we wanted to free up a bit of buying power in our model portfolio, so that our portfolio could assume at least a bit of exposure on the short side of the market.
After closing the KOL position, we sent an Intraday Trade Alert to our members (note trade details in "open positions" below), notifying them of our new long entry into ProShares Ultrashort MSCI Brazil ETF (NYSEARCA:BZQ). Although we recently stopped out of a buy entry into BZQ, it appears our timing was just a bit early. Now, after "undercutting" its 20-day EMA and 50-day MA, BZQ formed a vicious reversal candle on December 7th. Yesterday, this ETF followed through on the move by exploding through the 20-day and 50- day MAs, on a huge increase in volume. As BZQ now forms the right shoulder of a bullish "head and shoulders" pattern, this potential trend reversal is more likely to "stick" this time, especially if the broad market cooperates by pulling back. Further, this entry provides a better risk/reward ratio compared to the last trade in BZQ:
As shown on the chart below, the SPDR S&P China ETF (NYSEARCA:GXC) is dangerously close to losing support. A break below the November 23rd low of $76.79 provides a potential trigger to sell short GXC. A loss of this key support level could result in a decline that sends GXC down to test of the 200-day MA, presently just under the $73 level:
It is interesting to note many laggard ETFs that have been showing relative weakness to the broad market (such as UNG) are now beginning to show signs of breaking out, while many formerly leading ETFs (such as emerging markets ETFs) appear to be weakening. Such rotation out of leading sectors into market laggards is often an early sign of a broad market reversal. Put another way, when the dogs finally catch up to the pack, the race is often already over. Nevertheless, it is far too early to jump to the conclusion that the overall market is ready to reverse, but this type of rotation activity warrants the close attention of astute traders.
Deron Wagner is the Founder and Head Portfolio Manager of Morpheus Trading Group, a capital management and trader education firm launched in 2001. Wagner is the author of the best-selling book, Trading ETFs: Gaining An Edge With Technical Analysis (Bloomberg Press, August 2008), and also appears in the popular DVD video, Sector Trading Strategies (Marketplace Books, June 2002). He is also co-author of both The Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader (McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and Yahoo! FinanceVision. Wagner is a frequent guest speaker at various trading and financial conferences around the world, and can be reached by sending e-mail to: firstname.lastname@example.org.
DISCLAIMER: There is a risk for substantial losses trading securities and commodities. This material is for information purposes only and should not be construed as an offer or solicitation of an offer to buy or sell any securities. Morpheus Trading, LLC (hereinafter "The Company") is not a licensed broker, broker-dealer, market maker, investment banker, investment advisor, analyst or underwriter. This discussion contains forward-looking statements that involve risks and uncertainties. A stock's actual results could differ materially from descriptions given. The companies discussed in this report have not approved any statements made by The Company. Please consult a broker or financial planner before purchasing or selling any securities discussed in The Wagner Daily (hereinafter "The Newsletter"). The Company has not been compensated by any of the companies listed herein, or by their affiliates, agents, officers or employees for the preparation and distribution of any materials in The Newsletter. The Company and/or its affiliates, officers, directors and employees may or may not buy, sell or have positions in the securities discussed in The Newsletter and may profit in the event the shares of the companies discussed in The Newsletter rise or fall in value. Past performance never guarantees future results.
Charts created by TradeStation (tradestation.com).
Â© 2002-2010 Morpheus Trading, LLC
Reproduction without permission is strictly prohibited.