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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
  • Financial ETFs finally getting in gear 0 comments
    Mar 14, 2010 5:46 PM

    Stocks gapped higher on the open, sold off to parity shortly thereafter, then flat-lined through the rest of the day. It was a rather uneventful finish to a solid week of gains. Both the S&P 500 and Nasdaq Composite were unchanged, while the Dow Jones Industrial Average edged 0.1% higher. The small-cap Russell 2000 slipped 0.1% and the S&P Midcap 400 gained 0.2%. All the major indices closed near the middle of their tight intraday ranges. For the week, the Nasdaq Composite gained 1.8%, the S&P 500 1.0%, and the Dow Jones Industrial Average 0.6%.

    Turnover was mixed. Total volume in the NYSE was 7% greater than the previous day's level. Trading in the Nasdaq eased 4%. In both exchanges, volume was below 50-day average levels. Across the board, declining volume fractionally exceeded advancing volume. Overall, the session was quite a snoozer.

    For about the past eight months, the financial industry has generally shown relative weakness to the main stock market indexes. The laggard performance in financials has been one of the weakest points of the broad market's year-old rally. However, the sector really perked up last week, causing many financial ETFs to break out above long-standing levels of horizontal price resistance. If those breakouts in the financial ETFs hold up in the coming days, it could greatly benefit the S&P 500, which is heavily weighted by financial stocks. The S&P Financial SPDR (NYSEARCA:XLF), a popular ETF proxy for the overall financial arena, closed at its highest level of the past five months. On the weekly chart, XLF set its highest weekly close of the past eighteen months. The breakout is shown below:

    With the KBW Capital Markets SPDR (NYSEARCA:KCE), which we bought on February 26, we already have one position in the financial sector. However, at the time of entry, we only bought a HALF position of KCE, as we wanted to see more price confirmation before assuming the standard risk. Since then, KCE has performed well, trending steadily higher since breaking out above resistance of its five-month downtrend line. As such, we're now looking to add to the position on a pullback to support. The 20 and 50-day moving averages, as well as the prior downtrend line, have now become new support, so a pullback to that area is an ideal point to buy additional shares (or start a new position if the original entry was missed). If the pullback doesn't come, the formation of a tight "bull flag" pattern would also be ideal. The pullback zone of support is shown on the daily chart of KCE below:

    This week, we'll be paying attention to the price action of the euro, which has been in a steady decline against the U.S. dollar since December of 2009. On Friday, the euro gapped up to close above resistance of its 20-day exponential moving average. For short-term momentum traders, this could present a possible buying opportunity for a multi-day pop. However, we're more interested in the possibility of initiating a new, intermediate-term short position when the euro rallies into major resistance of its 50-day moving average. The action in the euro is represented in the daily chart of CurrencyShares Euro Trust (NYSEARCA:FXE), shown below:

    If FXE rallies above last Friday's high, it will move above resistance of its three-month downtrend line, annotated by the dashed blue line on the chart above. Above that lies key resistance of its 50-day moving average (the teal line). If FXE makes it to the 50-day MA, it will be the first touch of that pivotal moving average since the current downtrend began. If the chart of FXE was flipped upside down, and it was now in the process of pulling back to support of its 50-day MA, it would provide an ideal buying opportunity because the first pullback to the 50-day MA of a strongly trending ETF usually leads to a resumption of the dominant uptrend. In a downtrend, it's the same situation, in that the first rally into the 50-day MA provides an ideal entry point for an intermediate-term short position. Of course, timing is the key, as FXE could easily probe several percent above its 50-day MA, running stops, before it sees the resumption of selling pressure. As such, we've now begun monitoring the price action of FXE, but it's too early to consider a detailed entry point right now.

    Speaking of flipping the chart of FXE upside down, the inversely correlated ProShares UltraShort Euro (NYSEARCA:EUO) gives nearly that exact picture. Take a look:

    Because of the daily rebalancing of their portfolio of derivatives, most of the leveraged "short ETFs" have the disadvantage of significantly underperforming their underlying benchmark indexes in the intermediate to long-term. As such, we're more inclined to sell short FXE, rather than buying EUO, if the trade meets our entry criteria. Nevertheless, traders who have a non-marginable cash account, such as an IRA, may be inclined to buy EUO if we sell short FXE. There's a slight disadvantage, but unlike other leveraged "short ETFs," there has not been a huge amount of portfolio underperformance with EUO. Notice, for example, that EUO closed at support of its uptrend line, just as FXE closed at resistance of its downtrend line. Over the next week, we'll keep subscribers updated regarding the possibility of a euro ETF short entry. We also continue to monitor iShares Xinhua China 25 (NYSEARCA:FXI) for potential re-entry if it breaks out above the downtrend line shown in our March 12 commentary.

    Open ETF positions:

    Long - KCE, GDX
    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: none
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