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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
  • Sharp late-day reversal may test the market's resolve 0 comments
    Mar 26, 2010 7:50 AM

    If only looking at closing prices, without observing the actual trading session, one could be forgiven for thinking yesterday was a relatively uneventful day. However, it was far from it. Stocks gapped higher on the open, then rallied to rather sizeable gains by mid-day, but the main stock market indexes abruptly turned tail in the afternoon, selling off to finish near unchanged levels. The Dow Jones Industrial Average, up 1.1% at its intraday high, closed flat. The S&P 500 and Nasdaq Composite similarly surrendered early gains to slip 0.2% and 0.1% respectively. Small and mid-cap stocks showed notable relative weakness. Both the Russell 2000 and S&P Midcap 400 indices lost 0.7%. All the major indices closed at their dead lows of the day.

    Total volume in both the NYSE and Nasdaq rose 13% above the previous day's levels, as turnover moved back above average levels. Because the losses in the S&P and Nasdaq were only marginal, it technically was not a "distribution day." Yet, it was clearly indicative of bearish churning, caused by institutions selling into strength of the earlier gains. Volume levels picked up as the afternoon selling pressure intensified, which is never a positive sign for stocks. Market internals were very bullish earlier in the day, but rapidly deteriorated in the afternoon. By the closing bell, declining volume had slightly exceeded advancing volume in both exchanges.

    At the beginning of the week, many of the fixed-income (bond) ETFs were poised to break out above key levels of horizontal price resistance. The iShares 7-10 Year T-Bond Index (NYSEARCA:IEF) was one such ETF we were monitoring for potential buy entry on a breakout above the high of its recent consolidation. But instead of breaking out, the bond ETFs gapped down sharply on March 24, then continued lower. This sudden change of bias has positioned most of the bond ETFs to start a new leg down. Conversely, the ProShares UltraShort 20+ Year T-Bond (NYSEARCA:TBT), which moves inversely to the direction of the long bond, has started breaking out to the upside. Volume in each of the past two days has also surged to more than double the average level, indicating the inflow of institutional funds. This is shown on the daily and weekly charts of TBT below:



    In our March 23 commentary, we illustrated how the Nasdaq formed a "bearish engulfing" candlestick that was immediately followed by a "bullish engulfing" candlestick, and suggested that such unusual action was suggestive of increasing confusion and indecision in the markets. We then said, "Given the apparent tug-of-war between the bulls and bears over the past two days, this may be a good time to stay on the sidelines until the market figures out its next move. For professional traders, there are occasional periods when cold hard cash is clearly the best position. Right now may be one of those times." Later that day, all the major indices rallied to new 52-week highs, but pulled back into the range the following day. This was then followed by yesterday's roller coaster ride. Now, the main stock market indexes are right back to their March 22 closing prices. We heeded our own advice by patiently laying low with regard to new ETF entries, only taking one new trade (our sister newsletter, the MTG Stalk Sheet, which trades leading individual stocks, was slightly more active). So far, our patience and discipline over the past few days may be paying off.

    For the second time in a week, the Nasdaq Composite has formed a bearish "shooting star" candlestick pattern on its daily chart. This time, the rest of the major indices, as well as many industry sector ETFs did as well. Yesterday's "shooting star" in the S&P Financial SPDR (NYSEARCA:XLF) was particularly nasty, as it formed a very long "wick," after attempting to break out to a new high. This is highlighted on the daily chart below:

    When the Nasdaq initially formed a "shooting star" on March 17, the pattern failed to confirm itself the following day because the index did not close lower. Nevertheless, the pattern is still suggestive of a healthy dose of caution going into today's session. In the early pre-market, the S&P and Nasdaq futures are indicating a slightly higher open. If stocks open higher, and hold above yesterday's lows through the first hour of trading, there's a good chance the market will stabilize and/or attempt to move higher again. However, if traders immediately sell into strength of an opening gap, causing the major indices to violate yesterday's lows in the morning, bearish momentum could build on itself, driven by trapped bulls who bought yesterday's breakout to new highs, and short sellers seeking to take advantage of the reversal. For swing traders, cash seems like a good place to park money right now, though there may still be opportunities for rapid-fire daytraders of individual stocks.

    Open ETF positions:

    Long - UUP
    Short (including inversely correlated "short ETFs") - BRF
    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
    Themes: TBT, XLF
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