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Is The Market Ready for a Pullback? (GDX) - January 18, 2012

|Includes: GDX, Financial Select Sector SPDR ETF (XLF)
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The Wagner Daily - January 18, 2012
Concise technical analysis and picks of the leading global ETFs



Commentary:

Stocks moved higher on Tuesday but closed well off session highs. The five indices that we track all posted gains but an afternoon slide to took some of the luster off the day's action. The Nasdaq fared the best as it gained 0.6%, and was followed closely by the Dow Jones Industrial Average. The blue chip index tacked on 0.5% by the closing bell. In stair step like fashion, the S&P 500, S&P MidCap 400 and the small-cap Russell 2000 added 0.4%, 0.3% and 0.2% respectively.

Internals were mixed yesterday as volume slipped 0.3% on the NYSE but climbed almost 8.0% on the Nasdaq. Advancing volume held the open hand over declining volume for a second consecutive day. By the closing bell, the spread ratio stood at a plus 1.3 to 1 on the NYSE and a plus 1.6 to 1 on the Nasdaq. Although volume and advancing volume were both positive on the Nasdaq, we didn't like the price action in the market. Therefore, we would not consider yesterday an accumulation day on the Nasdaq.

Over the past four sessions the S&P Select Financial SPDR ETF (NYSEARCA:XLF) has attempted unsuccessfully to reclaim its 200-day MA and break rally above its long term downtrend line that began in February 2011. Yesterday, XLF formed a reversal candle and closed below both of these key resistance marks. Further, over the past two sessions, XLF has for the first time in several weeks, begun to exhibit relative weakness to the broad market. A move below yesterdays low of $13.66 could provide a shorting opportunity in this ETF. Although we are not placing SKF on the watchlist (nor are we inclined to go short), XLF could provide a quick trading opportunity. Tthe ProShares UltraShort Financial ETF (NYSEARCA:SKF) is a potential inverse proxy for XLF.



The Market Vectors Gold Miners ETF (NYSEARCA:GDX) has been one of the weakest exchanged traded funds in the market for several months now. Yesterday, on a pick-up in volume, GDX formed a bearish "engulfing" reversal candle, as it opened at the high and closed virtually at the dead lows of the session. Move move below yesterday's low of $52.86 could present a short entry trigger for this GDX. This ETF has better potential as a short entry since it is a sector that tends to trade in lockstep with the price of gold. Since gold is less correlated to the market than an equity ETF, GDX will generally present less risk when counter-trend trading. DUST is the inverse gold miners ETF. We may consider entering this trade for a "quick pop" should market conditions become favorable to do so. However, for the moment, GDX is not an official setup.



 

Yesterday proved to be a "gap and trap" session. However, this type of price action is understandable given that stocks have been rallying since December 20th. We would welcome a modest pullback in the market as it could provide buying opportunities in some of the stronger sectors such as pharmaceuticals and biotechs. Although we are bullish we must remain attentive of our positions if a pullback occurs. Should the market pull back, we will look to pare any positions that show signs of relative weakness.


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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