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Bullish trend reversal in UltraShort Long-term T-bond (TBT) - October 15, 2010

|Includes: ProShares UltraShort 20+ Year Treasury ETF (TBT), USO
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October 15, 2010

The major indices took a breather yesterday, as stocks closed slightly lower across the board. In an intraday pattern that was the opposite of the previous day's action, stocks trended lower throughout the morning, then recovered off their lows in the afternoon. The Dow Jones Industrial Average managed to finish unchanged, but the Nasdaq Composite and S&P 500 Index slipped 0.2% and 0.4% respectively. The small-cap Russell 2000 edged 0.2% lower, as the S&P MidCap 400 lost 0.5%. The Dow finished in the upper quarter of the day's range, while the rest of the main stock market indexes closed near the middle of their intraday ranges.

Volume receded slightly, enabling the broad market to dodge a "distribution day." Total volume in the NYSE was 2% lighter than the previous day's level. Turnover in the Nasdaq eased 12%. Trading in both exchanges remained above 50-day average levels. Market internals were negative, but not by a wide margin. In the NYSE, declining volume exceeded advancing volume by just over 2 to 1. The Nasdaq adv/dec volume ratio was only fractionally negative.

Several times over the past week, we briefly discussed are trailing stop strategy for maximizing profits on winning trades, specifically with regard to our long position in iShares Emerging Markets Bond Fund (NYSEARCA:EMB). Yesterday, EMB pulled back, triggering our tight trailing stop and knocking us out of the trade with a gain of approximately $2,000 (4.4 points, including an October dividend distribution). As you may recall, because the ETF was starting to become short-term "overbought," and was already showing a gain of approximately 3 times our average losing trade, we shifted to a tighter stop based on the 20-period moving average on the hourly chart. Since EMB closed below that moving average yesterday, it may be headed for a short-term correction. For long-term traders and investors willing to hold through a pullback, price action has not yet given any reason to sell. However, because the plays of this newsletter are short intermediate-term, we wanted to lock in the profit, rather than sitting through a potentially time-consuming retracement.

Lackluster investor demand for thirty-year government T-bonds yesterday sparked a selloff in the bond ETFs. Key levels of technical support, such as the 50-day moving averages, were convincingly violated on high volume. This had the effect of causing the inversely correlated UltraShort 20+ Year T-Bond (NYSEARCA:TBT) to break out above resistance of the lengthy downtrend line. Volumen TBT was also the highest of any day since late August. The daily chart of TBT is shown below:

TBT

Notice that TBT formed a bottom in August, bounced into resistance of its 50-day moving average in September, then pulled back in late September and early October. However, the pullback caused a "higher low" to be formed on the daily chart. This is the first sign of a potential trend reversal. Then, yesterday's action enabled TBT to blast through its 50-day moving average on strong volume. The move back above the 50-day moving average also corresponded to breakout above the downtrend line (dashed blue line). Upon spotting this action, we sent an Intraday Trade Alert to subscribers of The Wagner Daily, informing them we were buying TBT in the late afternoon. Our expectations for the trade is a short-term, momentum-driven rally to the area of the July 2010 highs. Our protective stop is about a point below convergence of the 20 and 50-day moving averages.

Going into today's session, traders may want to keep an eye on US Oil Fund (NYSEARCA:USO), which we discussed in our commentary two days ago. Take a look at the current setup:

USO

With USO consolidating in a tight range, right at resistance of its 200-day moving average, as well as its August 2010 highs, a move above yesterday's high could spark significant momentum that leads to a new uptrend. We are already long the trade from two days ago, and USO is currently near our entry price. But traders who missed our initial entry point might consider a secondary entry on a breakout above yesterday's high, and hence the 200-day MA.


The commentary above is an abbreviated version of our daily ETF trading newsletter, The Wagner Daily. Subscribers to the full version receive specific ETF trade setups with detailed trigger, stop, and target prices, as well as daily updates on all open positions. 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.




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