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Divergence amongst the major indices ($SPX, $COMPX, $DJI) - April 1, 2011

Apr. 01, 2011 8:26 AM ETSSG, ENY
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April 1, 2011

Thursday's session, the conclusion to the first quarter of 2011, ended with mixed results and in uneventful fashion. Throughout the session, stocks merely meandered in a tight range. For the second straight session, the small-cap Russell 2000 and S&P MidCap 400 led all other indices, showing relative strength by moving higher by 0.6% and 0.4% respectively. The Nasdaq Composite was unchanged, but both the Dow Jones Industrial Average and the S&P 500 edged slightly lower. The Dow declined 0.3%, while the S&P 500 lost 0.2% on Thursday.

Total market volume was modestly higher on Thursday, and declining volume was greater than advancing volume on both indices. Turnover rose by 5.6% on the NYSE and 3.5% on the Nasdaq. The S&P 500's loss on higher volume technically caused the index to register a bearish "distribution day," indicative of institutional selling. However, given the modest degree of the loss, as well as the divergent strength in small and mid-caps, it would be deceiving to say it was a weak session overall.

Yesterday, we exited our position in SLV, locking in a small gain. We haven't been thrilled by the price action since our late stage entry, so we will simply re-assess for a potentially better entry point. We also entered a new trade yesterday, via an Intraday Trade Alert.

The inversely correlated UltraShort Semiconductor ProShares ETF (SSG) hit its trigger for a partial buy entry. Over the past five sessions, SSG has been consolidating just above support of its 50-day MA, on declining volume (which is bullish in this case). Yesterday, this ETF gapped up, breaking out above resistance of its hourly downtrend line, and managed to close just four cents below the two-day high. A move above yesterday's high of $50.86, and above the three day high of $51.41, could provide a confirmed buy entry point for a trend reversal in this ETF. Full trade details are available to our members in the "open positions" section of this issue of The Wagner Daily below. Here is a snapshot of the pattern on the daily chart:


Breaking it down to the shorter-term hourly chart, notice how SSG is also breaking out above the downtrend line from the mid-March high. Whenever there is confirmation on multiple time frames, the odds of a successful trade are increased:


The Guggenheim Canadian Energy ETF (ENY) has been consolidating in a tight, sixty-cent trading range for the past nine days. A move back above yesterday's high of $22.94 may present a buying opportunity in this ETF. The setup is shown on the daily chart below:


There is an interesting divergence taking place among the major indices. While the Russell 2000 and the S&P MidCap 400 have roared to new highs, and the Dow is close to its 52 week high, both the S&P 500 and the Nasdaq remain well below key breakout levels. This divergence is somewhat concerning, as the Nasdaq is widely considered a leading indicator for the broad market direction. Further, the S&P 500 generally provides a good proxy for market breadth. Also of interest is the lack of volume during the most recent leg higher, combined with a mild session of distribution yesterday. Nonetheless, the market appears poised to move higher. Ultimately, we have no desire to fight the trend, but astute traders may agree a healthy degree of caution is warranted right now.

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.

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.

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