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Breakout Around the Bend (DUST) - January 11, 2012

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The Wagner Daily - January 11, 2012
Concise technical analysis and picks of the leading global ETFs



Commentary:

Following a strong morning gap up, stocks closed higher yesterday, but for the most part off session highs. The exceptions were small and mid cap stocks, which closed near session highs. The major indices all closed higher, with the small-cap Russell 2000 and the S&P MidCap 400 leading the advance. By session's end the small-cap Index added 1.5% while the S&P MidCap 400 improved by 1.3%. The Nasdaq, S&P 500 and Dow Jones Industrial Average posted gains of 1.0%, 0.9% and 0.6% respectively.

For the second time in as many sessions, market internals were bullish. Turnover quickened on the Nasdaq by a modest 1.8%, while on the NYSE it improved by an impressive 16.4%. The ratio of advancing volume to declining volume ended the day at a plus 4.1 to 1 on the NYSE and a plus 3.1 to 1 on the Nasdaq. Tuesday was a clear accumulation day across the board, as both exchanges posted solid gains on higher advancing volume. Institutions were in purchase mode on Tuesday.

Although we currently hold a bullish bias, the Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) could present a shorting opportunity under the right circumstances. Since bottoming on December 29th, this ETF has rallied back above resistance of its 20-day EMA. Given the current bullish market conditions, we would only consider this short if it rallies, overcuts and stalls near the 50-day MA. This level also corresponds with the long term down trend line (see chart). Please note, that for the moment, we are not inclined to be aggressive on the short side of the market. Market conditions would have to shift significantly for our bias to become bearish.



The ProShares UltraShort Euro (NYSEARCA:EUO) has been showing relative strength during the recent rally in the market. Typically, when the US markets Rally, EUO come under significant selling pressure. This is due to the fact that there is an inverse relationship between the stock market and the US dollar. When the market rallies, the dollar falls and this would normally result in EUO dropping (because Euro gets stronger when dollar falls). This inverse ETF could present a long entry into a pullback and undercut of the 20-day EMA. Notice how precisely the Relative Strength Index (EUO) has provided overbought signals every time EUO has seen a strong rally. The relative strength index is defined as follows:

The Relative Strength Index or RSI is a technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of a stock or ETF. An asset is deemed to be at an extreme (overbought) once the RSI approaches or crosses the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and therefore may be ready for a bounce. RSI can also help identify turning points when there are non-confirmations or divergences. For example, a new high in price without a new high in RSI may indicate a false breakout. In most software programs, this indicator automatically changes the color of the RSI line when it exceeds either of the levels specified in the inputs oversold and overbought (30 and 70 respectively). Horizontal lines are plotted at these levels as visual aids in most software.

 



Because of the gap-up yesterday, neither of our watchlist setups triggered. We sent an intraday alert cancelling the IWB trade and moved the trigger price higher on XRT. Our open position in IYT held up well yesterday but IYZ has show a bit less strength. We may increase the stops on both of these trades depending on their respective price action on Wednesday. For our subscribers, new trade details for XRT are posted in the watchlist section of the newsletter. Although yesterday's rally was reasonably bullish, it was fueled by significant "bottom fishing". Of the 297 industry groups that we track, the seven highest finishers on the day were from the bottom ten percent of these industry groups. This tells us that laggards were leading the market higher. However, strong stocks have fared well as of late and this is the price confirmation we have been looking for. We wouldn't be surprised to see a modest pullback on Wednesday. If the market is strong we should continue to see buying on any pullbacks.


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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