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All That Volume and No Place to Go: (SMH) - September 19, 2011

|Includes: ProShares UltraShort MSCI Emerging Markets ETF (EEV), SMH
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The Wagner Daily - September 19, 2011
Concise technical analysis and picks of the leading global ETFs



Commentary:

Stocks closed mixed on quadruple witching Friday as volume was brisk. Four of the five major indices finished higher with the Nasdaq, S&P 500 and the Dow Jones Industrial Average all posting modest 0.6% gains. The S&P MidCap 400 rose a slim 0.2% while the small-cap Russell 2000 was the day's laggard as it registered a 0.1% loss for the session.

Market internals ended the session mixed. As might be expected on an end of quarter options expiration day volume spiked across the board. Turnover surged on the Nasdaq by 36.0% and on the NYSE by almost 60.0%. However, advancing volume lost out to declining volume on the Nasdaq by a ratio of 1.2 to 1 while it bested declining volume on the NYSE by the same margin. After five days up in the market we saw considerable churning as stocks were unable to move higher despite the big volume. This is generally not a good sign for bulls as churning is often equated with distribution.

Via an intraday alert we entered a long position in the ProShares UltraShort MSCI Emerging Markets ETF (NYSE:EEV) on Friday. We liked the trade because EEV had pulled back and began to stabilize at support of its 20-day EMA. Further, over the past five sessions as the broad market has rallied, EEV has been one of the few inverse ETFs to hold support of its 20-day EMA. This exhibition of relative strength factored significantly in our decision to enter the trade. Trade details are available to our subscribing members in the open positions segment of the newsletter.


The Semiconductor HOLDRs ETF (NYSEARCA:SMH) formed a reversal candle on Friday and appears likely to find resistance at the current price. Notice the "churn" in SMH near the 50-day MA. As volume has spiked significantly SMH has moved only minimally higher. This type of price and volume action often appears when institutions are in distribution mode. A move below yesterday's low of $30.78 could present a shorting opportunity in this ETF.


As of this writing the S&P and Nasdaq futures are down significantly and most of the over-seas markets are down significantly. If this pattern holds we expect to see a substantial gap down at the open. This type of price behavior is quite common in down-trending markets and makes trading a bit more difficult since setups can occur with the formation of a single candle and big gap downs nullify may potential short entries. Consequently, we are always on the lookout for signs of churning and the formation of reversal candles as they provide early signals that the market may be running out of steam...


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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