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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
  • A fixed-income (bond) ETF poised for breakout 0 comments
    Mar 19, 2010 8:20 AM

    Failing to immediately follow through on the previous afternoon's weakness, the major indices meandered through yesterday's listless session before finishing with mixed results. Stocks opened flat, then chopped around in a sideways range throughout the entire day. Showing a bit of relative strength for a change, the Dow Jones Industrial Average gained 0.4%. The Nasdaq Composite edged 0.1% higher and the S&P 500 slipped less than 0.1%. The small-cap Russell 2000 and S&P Midcap 400 indices lost 0.3% and 0.4% respectively. The Dow finished near its high of the day. The Russell and S&P Midcap indices closed near their lows.

    Turnover eased across the board. Total volume in the NYSE was 9% lighter than the previous day's level, while volume in the Nasdaq receded 6%. In both exchanges, volume registered below average levels for the sixth consecutive day. In the NYSE, declining volume exceeded advancing volume by a margin of 2 to 1. In the Nasdaq, advancing volume was on par with declining volume.

    Select fixed-income (bond) ETFs have started to form interesting patterns that may soon present ideal buy entry points. Specifically, we like the formation on the daily chart of iShares 7-10 year T-Bond (NYSEARCA:IEF), shown below:

    The chart above shows IEF is positioned for a bullish trend reversal in the near-term. It has just completed the right shoulder of an "inverse head and shoulders" pattern, which is bullish if the price follows through to break out above the high of the neckline. Conveniently, resistance of the 200-day moving average converges with the neckline as well. This convergence should increase the upside momentum of a breakout. As for entry, we plan to buy IEF if it rallies above its March 17 high of $90.63. Such a move would cause IEF to break through its 200-day MA, neckline, and a significant area of horizontal price resistance. Substantial monthly dividend distributions are an added benefit to intermediate and long-term investments into IEF. On the longer-term weekly chart below, notice that IEF is also poised to break out above resistance of a downtrend line that's been in place for more than a year:

    In yesterday's commentary, we illustrated the buy setup in U.S. Dollar Bull Index (NYSEARCA:UUP), which had pulled back to support of its 50-day moving average. On the open, UUP triggered our buy entry, then trended higher throughout the morning. UUP pulled back slightly in the afternoon, but still gained 0.7% for the day, a sizeable one-day advance for a currency ETF. Closing above its 20-day EMA and hourly downtrend line, UUP is apparently on the way to resuming its dominant uptrend. So far, UUP is acting in the same manner as the last time it retraced to support of its 50-day MA, two months ago. Separately, we closed our position in Market Vectors Gold Miners (NYSEARCA:GDX) for a scratch. Having trouble with resistance of the $47 area, we made a judgment call to sell GDX at the breakeven level, when it fell below the previous day's low. Conversely, our short position in S&P Metals and Mining SPDR (NYSEARCA:XME) turned in a nice performance yesterday. Showing major relative weakness, XME fell 2.3% yesterday, giving the short position a solid unrealized gain one day after entry. Again, this is a very short-term, counter-trend trade, seeking to take advantage of an anticipated pullback in the sector. On the chart below, notice how Wednesday's "shooting star" candlestick preceded yesterday's sharp decline:

    Today is quarterly "quadruple witching" options expiration, the day on which contracts for stock index futures, stock index options, stock options, and single stock futures (SSF) simultaneously expire. Because traders are focused on moving stocks to close near their preferred strike prices, quadruple witching days are typically erratic and choppy, especially in the late afternoon. As such, we generally avoid new trade entries on quadruple witching days, preferring to wait to the following Monday instead. Our plan in today's session is to patiently sit on the sidelines, maintaining existing stops on open positions, while paying attention to price action for potential trading opportunities next week.


    Open ETF positions:

    Long - UUP
    Short (including inversely correlated "short ETFs") - XME
    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: short XME, long UUP
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