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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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Advanced Technical Analysis of ETFs
  • Why Stocks May Not Be "Out Of The Woods" Yet ($QQQ, $IWM, $SPY, $DIA) 0 comments
    Nov 26, 2012 9:11 AM | about stocks: QQQ, IWM, SPY, DIA

    It was obviously positive that stocks continued building on their gains since bouncing off their mid-November lows, and did so on higher volume last Friday. However, it's still too early to declare an end of the broad market's multi-month downtrend from its September 2012 highs. One of the biggest reasons we say this is because the main stock market indexes still have an abundance of overhead supply to contend with. Furthermore, several of the major indices are now bumping into, or are quickly approaching, key technical resistance levels. One good example of this can be seen on the daily chart pattern of PowerShares QQQ Trust ($QQQ), a popular ETF proxy for trading the Nasdaq 100 index:

    (click to enlarge)

    As you can see, $QQQ broke out above resistance of its 20-day exponential moving average last Friday. However, notice the horizontal price resistance just overhead, which was formed by the prior swing lows from late October, as well as the prior highs from July. Furthermore, the 200-day moving average, which formerly acted as support and now will provide formidable resistance, is less than 1% above the current price of $QQQ. Above that resistance level is the 50-day moving average, which has been sloping lower since mid-October, and is in danger of crossing below the 200-day moving average.

    Whenever a market is trying to form a significant bottom, but has a plethora of overhead resistance levels, it is common for there to be at least one shakeout that tests or "undercuts" the prior low (from November 16), before the index can reset itself and start heading back up. For these reasons, it is still too early to declare the Nasdaq has found a significant bottom.

    Another key broad-based ETF, the iShares Russell 2000 Index ETF ($IWM), has a similar chart pattern to $QQQ. The one difference is that it has already bounced to close right at its 200-day moving average last Friday. Furthermore, $IWM is still trading below the upper channel of its downtrend line from the September 2012 highs (the red line on the chart below), which may be difficult to overcome on the first few attempts. Take a look:

    (click to enlarge)

    We'll be closely monitoring the price action of both $QQQ and $IWM in the coming days, as the ability or inability of these indexes to move back above their 200-day moving averages, horizontal price resistance, and trend channel resistance may determine the tone of the broad market trend for the rest of the year. We focused on these broad-based ETFs, rather than the S&P 500 SPDR ($SPY) and Dow Jones Industrial SPDR ($DIA), because they better represent the performance of leading stocks (solid breakouts of leading individual stocks is a key component of a healthy market). Additionally, $QQQ and $IWM showed the most relative weakness of the broad-based ETFs on the way down, so they have the most technical damage to overcome.

    Although we are still monitoring for new, low-risk entry points for ETF swing trades on the short side (and/or buying inverse ETFs), we can not ignore last Friday's "accumulation day" (higher volume gains) in the market. Nevertheless, it's important to realize a market bottom is never a one-day event, so we need to see more evidence accumulate over the next two weeks to confirm that an intermediate-term bottom is in place. Specifically, we need to see convincing breakouts of fresh leadership stocks, while the major indices need to avoid printing a bearish "distribution day" (higher volume loss) over the next five days.


    To learn how to profitably trade stocks and ETFs in both uptrending AND downtrending markets, sign up to receive our best daily ETF and stock picks with The Wagner Daily swing trading newsletter.

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    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.

    © 2002-2012 Morpheus Trading, LLC
    Reproduction without permission is strictly prohibited.

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