Pullback buy entry setting up in Dollar Index ETF (UUP) - May 19, 2011
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The Wagner Daily - May 19, 2011
Concise technical analysis and picks of the leading global ETFs
Commentary:
Stocks moved higher on Wednesday but volume faded. The market rallied for the entire session without a significant intraday pullback. All five major indices closed near session highs. The Russell 2000 continued its sharp rebound as it tacked on a healthy 1.7% gain yesterday. The S&P MidCap 400 and the Nasdaq posted impressive advances of 1.5% and 1.1% respectively. The Dow Jones Industrial Average and the S&P 500 underperformed on the day but were still able to add solid gains of 0.7% and 0.9% respectively.
Although price action was strong market internals ended the session mixed. Volume dropped on both exchanges. Turnover fell by 15% on the Nasdaq and 10% on the NYSE. The advancing volume to declining volume ratio ended the session at an impressive 3.5 to 1 on the NYSE and 4.5 to 1 on the Nasdaq. Despite yesterday's strong price action, the lack of volume eliminates any possibility that institutional accumulation was driving the advance.
In the past two newsletters we have been closely monitoring the progress of PowerShares DB Agricultural ETF (DBA) as a possible short candidate. Yesterday DBA entered what we described as the "ideal shorting zone" in the May 17th newsletter. This ETF now faces stiff resistance at the 20-day EMA, the May 10th swing high of $33.35 and the declining 50-day MA. We will now be watching carefully to identify a setup trigger to develop allowing us to enter the trade. This might include a major reversal candle or consolidation at these levels followed by a breakdown from the consolidation zone. Under no circumstance would we enter a short position in DBA just because it entered our "ideal shorting zone". A legitimate technical setup must be allowed to form before we will consider a short entry. To enter a position without a technical setup and legitimate entry trigger is nothing more than guessing.
In the May 19th Newsletter we made the following comment about the PowerShares DB US Dollar Bull ETF (UUP), "now that UUP has broken above the downtrend line, the 20-day EMA and the 50-day MA, it presents a possible buying opportunity on a pullback to the 20-day EMA". However, given yesterday's price action in UUP an alternative long setup may be present. Notice that in two of the past three trading session UUP has undercut its 50-day EMA and formed bullish reversal candles. These undercuts serve to sweep stops and entice further shorts to enter the trade. Ideally we would like to see further consolidation al or a modest pullback from the current price level but a move back above yesterday's reversal high of $21.64 would be a legitimate buy entry. We are carefully weighing the possibility of buying UUP from this alternative setup.
Over the past two days setups that meet our technical rules have been sparse. Following an abrupt rally or selloff it is not unusual for it to take several days for patterns to develop. Patience is a key trading skill to develop during these periods. It is easy to over trade during these moments and overtrading generally results in getting chopped up by the market.
The major indices have now rallied back into key resistance levels. Both the Nasdaq 100 and the small-cap Russell 2000 are lagging the broad market. Leadership stocks remain well below new highs and long setups are almost nonexistent. The longer that leadership stocks and market internals continue to flounder, the more likely it becomes that we will see a more pronounced correction. We would not be surprised to see a gap up and an intraday reversal today.
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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