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Possible Swing Trade Entry Into Small-cap ETF ($SCZ)

|Includes: DVY, EWM, iShares MSCI EAFE Small-Cap ETF (SCZ), SOXL

Stocks surged higher on Thursday but on lighter trade. Following Wednesday's poor performance, bulls stepped back into the market yesterday, carrying the major indices well into the black. Yesterday's rally easily erased all of Wednesday's losses. Higher beta issues dominated the action, as the small-cap Russell 2000, S&P MidCap 400 and Nasdaq posted gains of 2.0%, 1.6% and 1.5% respectively. The S&P 500 added 1.1%, while the DJIA climed 1.0%. Technology issues caught fire resulting in a strong showing by the semiconductor, networking and software sectors. The banking, insurance and oil services sectors also outperformed. The homebuilder and defense sectors were the day's big losers

Although Thursday's price action was quite bullish, market internals ended the session mixed. Turnover fell on the Nasdaq by 5.0% and on the NYSE by 1.3%. Advancing volume easily topped declining volume on both exchanges. By the closing bell the spread ratio stood at a plus 5.7 to 1 on the NYSE and a plus 4.2 to 1 on the Nasdaq. Yesterday felt like an accumulation day but the light volume suggests that institutions were not fully vested in the day's action.

Yesterday, on above average volume, the iShares MSCI Malaysia Index Fund (NYSEARCA:EWM) formed a bullish reversal candle. EWM undercut its 20-day EMA but roared back to close near session highs. A volume powered move above Thursday's high of $14.42 could provide a buying opportunity in this ETF. On pullback entries, we generally look to enter long positions just above big reversal candles.

The iShares MSCI EAFE Small Cap Index Fund (NYSEARCA:SCZ) undercut its 200-day MA and held support at the three day low yesterday. Futher, SCZ formed a reversal candle and is now poised to make a move higher if it can get above the two day high of $39.18. We will be monitoring SCZ closely for a possible long entry.

XLU hit its trigger yesterday and we entered the trade. SOXL rallied strongly and closed at session highs (up over 7%). We may look to exit this position if it gaps up in the morning. DVY ripped higher on big volume and also closed near session highs. Our watchlist candidates, PPH and IAU, both closed at session highs and are now within striking distance of their entry triggers.

After being placed under duress on Wednesday, the market demonstrated bullish resiliency, as it recovered to set new highs. Once again buyers stepped in to buy the pullback and reverse the tables on market bears. The only thing missing from yesterday's rally was strong volume. It would have been nice to see the market put in an accumulation day in the wake of Wednesday's selling.

The commentary above is an abbreviated version of The Wagner Daily, a daily ETF and stock swing trading newsletter. Subscribers to the full version also receive detailed entry and exit prices for potential swing trade entries, and an additional section dedicated to individual stock trades. To learn more about our trading strategy, please visit our blog.

Deron Wagner is a professional hedge fund manager who founded Morpheus Trading Group, a swing trader education firm, in 2002. He is the author of the best-selling book, Trading ETFs: Gaining An Edge With Technical Analysis. His new book, Advanced Technical Analysis of ETFs, will be released in August 2012. Past television appearances include CNBC, ABC, and Yahoo! FinanceVision. Wagner is also a frequent guest speaker at various trading events around the world, and can be reached by sending e-mail to: deron@morpheustrading.com.

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