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Waiting for a bounce to short Agriculture ETF (DBA) - May 17, 2011

May 17, 2011 9:14 AM ETIWM, DBA
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The Wagner Daily - May 17, 2011
Concise technical analysis and picks of the leading global ETFs


Stocks followed through on Friday's tumble and for the second consecutive day technology and leadership stocks got hit hard. By the closing bell all five major indices were trading near session lows. For the second day in a row the small-cap Russell 2000 led the decline. This index fell 1.7% during the session but was trading down another .3% after the close. The Nasdaq and the S&P MidCap 400 were also pummeled as they lost 1.6% and 1.0% respectively. The Dow Jones Industrial Average dropped 0.4% while the S&P 500 shed 0.6%. The fact that the DJIA and the S&P 500 have held up comparatively well over the past two sessions suggests that money may be seeking refuge in large cap dividend performers.

Although not overwhelmingly negative, when taken in context of the number of distribution days that have occurred in the market over the past month, Monday's internals still suggest the market is weakening and a significant selloff could be at hand. Another distribution day was not what the market needed. Declining volume outpaced advancing volume across the board. The ratio of declining to advancing volume ended the day at 2 to 1 on NYSE and 3.5 to 1 on the Nasdaq. Assisted by a late day surge, volume closed up on both exchanges. While the Nasdaq saw trade increase by over 7%, turnover on the NYSE was only modestly higher. Still, the volume was high enough to classify Monday as a distribution day on Wall Street. Monday's bearish price action would appropriately be classified as both a bearish follow through day and as a distribution day among institutional investors.

Near the close yesterday we sent an alert that we were exiting SLV despite the fact that it had not hit its stop. We decided to impose a time stop due to the weakness in the broad market. Further, we viewed SLV as a quick momentum reversal trade and we did not like the fact that it failed to follow through relatively quickly. Our short position in EWJ continued to act well yesterday and we anticipate further deterioration in this ETF over the next several days.

Our watchlist candidate IWM hit its short trigger yesterday and we entered the trade. In yesterday's newsletter we stated, "Due to the relative weakness being exhibited by the iShares Russell 2000 Index ETF (IWM) we are placing it on the watchlist as a possible short candidate. Should the market turn lower over the next several days, IWM will likely drop the hardest due to its recent lack of strength compared to the broad market. Further, this ETF is trading below its trendline and a move below the two day low of $82.98 would result in a loss of support of the 50-day MA". Yesterday IWM continued to exhibit relative weakness as it dropped the most (2.1%) of any of the major indices.

Below are charts of the Nasdaq, S&P 500 and the Russell 2000 (IWM). A quick comparison of these charts to the same charts presented in Monday's newsletter shows the swift deterioration in the market yesterday. At the closing bell on Friday, the Nasdaq was showing relative strength to the broad market (Compared to S&P 500). However, by the close of business yesterday, the Nasdaq was showing relative weakness to the broad market. The Nasdaq is now resting on its 50-day MA while the S&P 500 is approximately 0.5% above this key market. The IWM has clearly lost support of its 50-day MA and is now poised for further downside.

The PowerShares DB Agriculture ETF (DBA) has been under significant selling pressure since late April. Further, over the past two weeks it has clearly demonstrated relative weakness to the broad market as it has traded below the 20 and 50 day moving averages. This ETF would likely provide an ideal shorting opportunity with a move back above the two day high of $32.57. Typically, a "shakeout" move like this is needed prior to a possible move lower. The obvious entry would be a drop below the three day low but the market generally doesn't reward the "obvious". Nonetheless, an abrupt move below $32.00 could provide an alternative short trigger but the risk/reward of the trade improves dramatically with a bounce into the 20-day EMA.

With yesterday's selloff the health of the market is now in question. Internals are deteriorating. Over the past twenty sessions the market has seen at least 5 distribution days and arguably a sixth. Further, for the second time in as many days, leadership stocks got hit hard. Leaders such as GOOG, BIDU, AAPL, PCLN, NFLX and AMZN showed relative weakness as they plunged by 2.1%, 2.1%, and 2.2%, 3.7%, 3.8%, 4.3% and 5.2% respectively. That many distribution days in such a short period of time generally leads to an abrupt round of selling. By no means are we calling a top. Rather, we believe that caution is warranted on the long side of the market at this time and that the odds may favor short setups and sitting in cash.

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.

Charts created by TradeStation (tradestation.com).

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