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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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Advanced Technical Analysis of ETFs
  • Led by Goldman, Securities Broker-Dealer ETF may soon break out 0 comments
    Mar 5, 2010 6:04 AM

    The main stock market indexes continued to consolidate in a tight, sideways range for the third straight day yesterday, as a touch of late-day strength enabled stocks to close moderately higher. The Nasdaq Composite and Dow Jones Industrial Average registered matching gains of 0.5%, while the S&P 500 similarly rallied 0.4%. Matching the pace of the broad market, the small-cap Russell 2000 also rose 0.5%. Although it only eked out a gain of 0.1% yesterday, the S&P Midcap 400 scored its seventh consecutive advance, and also set a new 52-week closing high for the third session in a row. All the major indices finished near their best levels of the day.

    Volume in the Nasdaq continued to recede, falling below its average level. Total volume in the Nasdaq eased 16% below the previous day's level. Turnover in the NYSE ticked 1% higher. With a closely-watched jobs report due in today's pre-market, institutions are apparently taking a "wait and see" approach before jumping back on the buy side of the market. Regardless of the market's knee-jerk reaction to today's data, we're likely to see a pick-up in trading activity to close the week. As for market internals, advancing volume exceeded declining volume by approximately 3 to 2 in both exchanges.

    Although we usually don't talk about individual stocks in this newsletter, investment banking giant Goldman Sachs (NYSE:GS) showed great relative strength and broke out above a key area of price resistance yesterday. GS surged 3.7% higher, and volume also rose above average. The breakout above major resistance is shown on the daily chart below:

    Bullish momentum from yesterday's convincing breakout in GS is likely to persist for at least the next several days. If it does, the price action of GS could help lend a positive bias to the overall stock market because financials have been one of the weaker industries holding the market trend in check. In the March 3 issue of The Wagner Daily, we said of the overall financial industry, "if this sector can finally get in gear, breadth would improve, adding more fuel and conviction to the stock market's recovery off last month's lows. Many of the Financial ETFs are nearing key resistance levels that could lead to a breakout."

    Two days ago, we looked at the Regional Bank HOLDR (NYSEARCA:RKH) as a financial ETF that could soon reverse its downtrend. However, with GS heating up, there may be a better trading opportunity in Capital Markets SPDR (NYSEARCA:KCE), an ETF comprised of seventeen stocks in the securities broker/dealer sector. In a downtrend since October of 2009, KCE firmly broke out above its 50 and 200-day moving averages yesterday, before closing right at resistance of its downtrend line. The potential bullish reversal in KCE, led by developing relative strength in GS, is shown on the daily chart below:

    Although KCE has not yet broken out above its weekly downtrend line, we bought a HALF position in yesterday's session. The intraday relative strength and breakout of GS, combined with KCE moving above its 50-day moving average, made an anticipatory entry relatively low-risk, especially considering it was only a partial position. If KCE goes on to break out above its five-month downtrend line in the coming days, we will then look to buy the remaining shares on the first subsequent pullback, holding in expectation of a new, intermediate-term uptrend in the broker-dealer industry.

    Also in our March 3 commentary, we pointed out the potential buy setup in iShares U.S. Technology Sector Index (NYSEARCA:IYW). Yesterday morning, IYW "undercut" its lows of the preceding two days, but reversed steadily higher in the afternoon, closing above its 50-day moving average. Because of the early "shakeout" action that led to a positive close, we sent an Intraday Trade Alert to subscribers, informing them of our buy entry in IYW, as it moved back above its 50-day MA and horizontal price resistance. An updated snapshot of the IYW play is shown below:

    The major indices have been pretty stagnant, drifting in a narrow range, for the past three days. Still, the price action and volume patterns have not been unhealthy. Stocks are still above short-term support of their 20-period exponential moving averages on the hourly charts, and are holding above support of their prior "swing highs" from February. The small and mid-cap indexes are even trading at fresh 52-week highs. If the S&P, Nasdaq, and Dow surge above their three-day highs today, those indexes could soon join the Russell and S&P Midcap at moving back to their January 2010 highs. But at that point, we would actually consider lightening up and/or tightening stops on long positions. Obviously, there is a risk that the pre-market employment data could spark a swift drop in the broad market today, but the overall technical picture still slightly favors the bulls. Without risk, there is no profit. As traders, taking calculated, controlled risks is what we get paid to do.

    Open ETF positions:

    Long - FXI, IYW, KCE
    Short (including inversely correlated "short ETFs") - (none)
    The commentary above is an abbreviated version of a daily ETF trading newsletter, The Wagner Daily. Regular subscribers receive daily updates on all open positions, as well as new ETF trade setups with detailed trigger, stop, and target prices. Intraday Trade Alerts are also sent via e-mail and/or text message, on as-needed basis. For your free 1-month trial to the full version of The Wagner Daily, or to learn about our other services, please visit morpheustrading.com.

    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 deron@morpheustrading.com.



    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.


    Disclosure: Long GS, Long FXI
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