The Wagner Daily - May 3, 2011
Concise technical analysis and picks of the leading global ETFs
After a morning gap up stocks fell under selling pressure and ended the day near session lows. Monday marked the first day since April 18th that the market has fallen under any significant selling pressure but volume was mixed. The major indices all finished the day in the red. Small cap stocks took the brunt of the selling as the small-cap Russell 2000 plunged 1.1%. The S&P MidCap 400 dropped 0.6% while the Nasdaq shed just over 0.3%. The S&P 500 closed down 0.2% and the Dow Jones Industrial Average fell fractionally.
Market internals were mixed on the session. While volume was up by 3.7% on the NYSE it declined by just over 15% on the Nasdaq. However, declining volume was higher than advancing volume across both indices. By the closing bell the declining volume to advancing volume ratio hit 1.5 to 1 on the Big Board and 1.4 to 1 on the Nasdaq. Due to the light volume on the Nasdaq we would not characterize Monday as a distribution day. It is more likely that traders were taking profits following a strong eight day stretch in the broad market.
In line with our game plan discussed in the notes section of yesterday's newsletter, we sold our positions in IEO, KOL and XES into the morning gap up. We felt that a gap up would take these ETFs into resistance at the previous swing highs and offered a logical price point to exit the positions. These trades netted a solid 0.9% gain for the model account. We sold XES at a fractional gain within the first half hour of the day because it had been showing relative weakness to the other two positions and to its sector (oil/oil related) for the past two days. Twenty minutes later we exited our positions in IEO and KOL as we didn't like the broad market internals. Having a solid game plan coming into the trading day clarifies the thought process when looking to exit a trade. We anticipated the gap up and were able to sell into strength without having to analyze the trade "on the fly". A good exit strategy is just as important as having a good entry plan.
Yesterday, the Global X Lithium ETF formed a bearish engulfing candle as it opened at the high of the day and closed virtually at the low of the day. Friday's entire trading range was "engulfed" by the candlestick formed yesterday. This is considered one of the more reliable candlestick patterns particularly in light of yesterday's price action. A move below the three day swing low of $21.84 may present an opportunity to short LIT.
The Market Vectors Rare Earth/Strategic Metals ETF (NYSEARCA:REMX) has formed a bullish pennant like formation over the past month. It has done so on contracting volume which is often considered bullish when an ETF is consolidating. A volume assisted move back above $27.95 could provide a buy entry trigger for REMX. It is noteworthy that REMX does have some (although modest) exposure to lithium mining and therefore a significant fall in LIT could dampen a REMX rally.
Yesterday's price action was typical for a market that has spent the past eight days in rally mode. A pullback accompanied by consolidation is likely necessary if the market is to continue its advance.
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).
© 2002-2010 Morpheus Trading, LLC
Reproduction without permission is strictly prohibited.