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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
  • Why Swing Trading Stocks And ETFs Has Been So Tricky Lately 0 comments
    Apr 18, 2013 12:32 AM | about stocks: SPY, MDY, IWM, QQQ, DIA

    Rather than looking at actionable ETF trade setups in a market that has not exactly been conducive to new swing trade entries lately (whipsaw city), today we will instead assess the current technical support and resistance levels of several broad-based ETFs that track the main stock market indexes. Upon doing so, you will understand why the stock market's recent price action has been like a wild rodeo ride.

    First up is the daily chart of S&P 500 SPDR ($SPY), an ETF that tracks the benchmark S&P 500 Index:

    $SPY daily chart pattern

    As circled in pink, notice that yesterday (April 17) was the first time $SPY has touched support of its 50-day moving average (teal line) since its current uptrend began (with the gap up of January 2, 2013).

    The 50-day moving average is widely viewed by institutional traders as a pivotal level of intermediate term support or resistance. Whenever stocks and ETFs are in a steady uptrend, the first pullback that touches the 50-day MA (following the start of a new uptrend) usually sparks institutional buying activity. This, in turn, causes perceived support of the 50-day MA to become a self-fulfilling prophecy.

    Since yesterday's intraday low of $SPY neatly correlated with the first touch of the 50-day MA (since the current uptrend began), we will be monitoring this level closely in the coming days, in order to determine whether or not institutions will step in to support the market at current prices. But even if the 50-day MA of $SPY fails to hold support, there is major horizontal price support, formed by prior resistance from the highs of February, just below. Just above that horizontal price support is technical support of the lows of the recent trading range.

    Next up, let's assess the SPDR Dow Jones Industrial Average ($DIA). Although the Dow Jones is a very narrow-based index comprised of only 30 blue-chip stocks, it is nevertheless an important psychological indicator of the market's health because it is the index the talking heads of the financial media typically focus on in their daily chatter:

    $DIA daily chart pattern

    Given how substantial this week's decline has been, are you surprised to see that the Dow (as represented by $DIA) is actually still holding near-term support of its 20-day exponential moving average? Even if it falls below yesterday's low, the index still must drop another 1.6% in order to even come in contact with its 50-day MA. Even if that happens, it would still be only the first touch of the 50-day MA so far this year.

    Now, let's jump to the other end of the spectrum by assessing the chart of the small-cap iShares Russell 2000 Index ($IWM). This index is definitely less widely followed by the general public than the price of the Dow Jones. However, with our technical swing trading strategy, the performance of the Russell 2000 is quite important because the majority of our swing trades in individual stocks (not ETFs) are in high-growth small to mid-cap stocks. Here's a snapshot of $IWM:

    $IWM daily chart pattern

    As you may have immediately observed upon first glance, $IWM has been showing major bearish divergence compared to $DIA. While the Dow remains above its 20 and 50-day moving averages and is still in a steady uptrend, the Russell 2000 has already broken down below both its 20 and 50-day moving averages. Both the Nasdaq Composite ($COMPQ) and S&P Midcap 400 Index ($MDY) have fallen below their 20 and 50-day MAs as well, but $IWM has the weakest pattern.

    Although small caps have clearly been showing relative weakness in recent weeks, notice the index is nearing a major level of horizontal price support that could attract buying interest (prior lows from late January and February). Nevertheless, $IWM must now absorb a plethora of overhead supply. Further, resistance of the 20-day EMA is now sloping downwards, and is in danger of making a bearish crossover below the 50-day moving average. All of these factors present a challenge for small-caps.

    In comparing the technical patterns of three charts above, it should be readily apparent that the main stock market indexes are definitely out of sync with one another...and THIS is the biggest challenge in trading the markets right now.

    Whenever the major indices display substantial price divergence between one another (as they are now), the typical end result is choppy, indecisive trading that leads to a lack of follow-through in even the best chart patterns and trends of leading stocks and ETFs. Conversely, the biggest percentage gains in swing trading stocks and ETFs are usually earned in stock markets where all the major indices a trending in a similar manner.

    Because of the current market environment, we have temporarily shifted into "SOH mode" (sitting on hands). This means we are just focusing on managing existing open positions, rather than opening new ones. This keeps our risk exposure minimal, while still allowing us to potentially lock in gains on current positions. With such divergence among the major indices, it is merely a gamble to predict the direction of the broad market's next move.

    An exception to our current "SOH mode" is the two Southeast Asia ETFs that remain on our "official" watchlist going into today (regular subscribers to The Wagner Daily newsletter should note our preset entry and exit prices for potential swing trades in $THD and $EIDO). Both ETFs held up incredibly well by virtually ignoring yesterday's decline in the US markets, so their bullish patterns we pointed out in yesterday's newsletter are still valid.

    Remember that one of the main benefits of trading ETFs, particularly in choppy and indecisive market environments, is that we have the ability to enter ETFs with a low correlation to the direction of the overall US stock market (such as international, currency, bond, and commodity ETFs).


    The above stock and ETF trading analysis is a shortened version of the April 18 issue of The Wagner Daily swing trading newsletter. Visit this page to learn more and start your 30-day risk-free trial membership today.

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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.

    © 2002-2013 Morpheus Trading, LLC
    Reproduction without permission is strictly prohibited.

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