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iShares China (FXI) confirms its breakout

Jumping higher after the open, then reversing into negative territory shortly thereafter, stocks got off to a whippy, volatile start yesterday morning. However, price action stabilized in the afternoon, enabling the major indices to settle near the flat line, just as they've done several times over the past week. The Nasdaq Composite advanced 0.3%, the Dow Jones Industrial Average edged 0.1% higher, and the benchmark S&P 500 Index was unchanged. The small-cap Russell 2000 and S&P Midcap 400 indices eked out gains of 0.2% and 0.1% respectively. The main stock market indexes closed near the middle of their intraday ranges.

Total volume in the NYSE declined 4%, while volume in the Nasdaq was 8% greater than the previous day's level. However, turnover in both exchanges remained below 50-day average levels. Trading during the holiday-shortened week leading up to Easter is typically slow, and this time has been no exception. Since today is the last day of the first quarter, we might see a bit more activity today, but volume will probably remain at depressed levels until next week. Price action could easily remain range-bound until next week as well.

The U.S. Dollar Bull Index (NYSEARCA:UUP), which we bought after it pulled back to the 50-day MA on March 17, has retraced back to support of last week's breakout level. This pullback may provide a secondary buy entry for traders who missed our initial entry. Take a look:

The most basic tenet of technical analysis states a prior level of resistance becomes the new level of support, after the resistance is broken. As such, prior resistance of the February 2010 highs should enable UUP to hold firm near its two-day lows. The rising 20-day exponential moving average (the beige line) further provides support. We still anticipate a resumption of the intermediate-term uptrend, and will look for a move out to new highs next week.

As anticipated, iShares Xinhua China 25 Index (NYSEARCA:FXI) has gapped above its recent resistance, confirming the break of a five-month downtrend line. In the March 29 issue of The Wagner Daily, we illustrated how FXI had "undercut" the lows of its recent consolidation, and suggested such action would likely lead to a breakout above its recent resistance and downtrend line. Two days later, that's what has happened. With FXI now showing clear relative strength to the domestic broad market, it should be less susceptible to any weakness that hits the S&P, Dow, or Nasdaq in the near-term. The FXI breakout is shown on the daily chart below:

With the major indices "correcting by time" near their recent highs, and traders laying low ahead of the holiday weekend, we're laying low with regard to new position entries. However, if price action remains in a bullish consolidation pattern, we could start to see new opportunities arise next week. But until then, we'll simply focus on managing our existing four open positions for maximum profitability.

Open ETF positions:

Long - UUP, FXI
Short (including inversely correlated "short ETFs") - BRF, TBT
The commentary above is an abbreviated version of a daily ETF trading newsletter, The Wagner Daily. Regular subscribers receive daily updates on all open positions, as well as new ETF trade setups with detailed trigger, stop, and target prices. 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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Disclosure: Long FXI, Long UUP