Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Potential buy setup forming in Dollar Index ETF (UUP) - May 18, 2011

|Includes: DBA, PowerShares DB USD Bull ETF (UUP)
MTG logo

The Wagner Daily - May 18, 2011
Concise technical analysis and picks of the leading global ETFs



Commentary:

Stocks rebounded from session lows on Wednesday to significantly pare opening losses and close the day mixed. The S&P MidCap 400 showed the most weakness on the session as it dropped 0.7%. The Dow Jones Industrial Average and the small-cap Russell 2000 lost 06.% and 0.1% respectively. However, both the Nasdaq and the S&P 500 managed to close flat on the day. Yesterday's reversal could reasonably be expected following two days of broad market selling.

The market took a breather from distribution yesterday as market internals were mixed. Volume was higher across the board. Turnover increased on the Nasdaq by 7.2% and on the NYSE by 10.2%. Despite the intraday recovery declining volume still outpaced advancing volume on both exchanges. The spread ratio fell in favor of declining volume by a factor of 1.2 to 1 on the NYSE and 1.9 to 1 on the Nasdaq. Although volume was up on the session and declining volume outpaced advancing volume across the board, the mixed price action indicates that neither accumulation nor distribution took place in the market yesterday.

Due to the intraday reversal, we decided to cover both of our short positions yesterday. Our trades in IWM and EWJ both resulted in modest but reasonable profits in absolute dollar terms. We are now 100% cash in the model account. Please note that we are removing FXZ from the watchlist since the recent price action in this ETF has nullified the setup.

The PowerShares DB US Dollar Bull ETF (NYSEARCA:UUP) recently broke out of a protracted downtrend on a significant expansion in volume. Unlike stocks, large increases in volume are much more likely to be a proximate indicator to a change in trend with currencies. Volume often provides an early clue that a trend reversal may be on the horizon with equities but it generally does not provide an immediate indication as a technical tool. Now that UUP has broken above the downtrend line, the 20-day EMA and the 50-day MA, it now presents a possible buying opportunity on a pullback to the 20-day EMA. We will be closely following this ETF for a potential long entry.



In yesterday's Newsletter we discussed the possibility of DBA as a short setup. We stated, "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". Notice how DBA "suckered" in the bears with a blatantly obvious undercut of the three day low at $32.02. This move serves to both draw in short sellers and sweep stops placed too close to support. Now that phase one of this setup is complete we will continue to monitor this ETF as a short entry. The chart of DBA from Tuesday's newsletter is provided below for easy comparison.





Given the sharp selling over the past few days, we would expect to see a bounce in the market. It will be interesting to see how the market reacts now that internals have moved to the bearish camp. Other than the DJIA all of the major indices are in danger of losing support of their respective 50-day moving averages. If the broad market can't find the strength to hold support at the current levels and rally firmly back above the above the 50-day and/or 20-day moving averages, a sharp round of selling could very well occur.


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).

© 2002-2010 Morpheus Trading, LLC
Reproduction without permission is strictly prohibited.