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Stalking iShares DJ Broker-Dealers (IAI) for potential buy entry

As has become par for the course lately, the major indices chopped around in indecisive fashion yesterday before again finishing near the middle of their recent trading ranges. This time, stocks finished moderately lower, but not enough to cause any substantial changes to the current technical picture. The S&P 500 lost 0.3%, as the Dow Jones Industrial Average and Nasdaq Composite both slipped 0.5%. The small-cap Russell 2000 declined 0.8% and the S&P Midcap 400 Index fell 0.5%. Late afternoon selling pressure caused all the main stock market indexes to close near their intraday lows.

Not surprisingly, end of quarter positioning caused volume levels to rise across the board. Total volume in the NYSE increased 32% above the previous day's level, while volume in the Nasdaq ticked 11% higher. The losses on higher volume caused both the S&P 500 and Nasdaq Composite to register a bearish "distribution day," but the appearance of institutional selling could have been attributed to a bit of quarter-end "window dressing." When the new month begins and the Easter holiday has passed, the volume pattern of the broad market should give us a much clearer indication of what's really happening "under the hood."

Recently, we said the main stock market indexes are merely "correcting by time," consolidating near their highs, rather than pulling back significantly. Between a "correction by time" and "correction by price," the former is more bullish because it indicates the bears are not taking advantage of selling into strength while the bulls take a rest. Put another way, markets that correct by time could be said to have more relative strength than markets that pull back at the same time. As we kick off the first day of the second quarter of 2010, several of the major indices now have clearly defined, albeit choppy, ranges we can monitor for potential breakout in the coming days. Specifically, we've observed the large cap segment as showing near-term relative strength, within a tight, sideways range. This is illustrated on the daily chart of Direxion Large Cap Bull 3x Shares (BGU):

In the March 29 issue of The Wagner Daily, we said we were monitoring KBW Capital Markets SPDR (NYSEARCA:KCE) for an "undercut" of its 20-day exponential moving average, which could give us an ideal buy entry the following day (as per our recent "undercut" entry into FXI). Yesterday, KCE indeed provided us with the "undercut" we were looking for, so a rally above yesterday's high is technically a low-risk entry point. However, the daily chart pattern of the similar iShares Dow Jones Broker-Dealers Index (NYSEARCA:IAI) may be slightly better than KCE. With several days of tight trading right at the 20-day EMA, and the uptrend line off the February low providing support, we plan to buy IAI on a rally above yesterday's high. Take a look:

Other, broader-based financial ETFs may be showing more relative strength near their recent highs (such as the benchmark XLF). However, we like the reward/risk ratio of an entry into IAI, as it is likely to at least make another leg higher in the near-term. For a leading indication of the performance of the broker-dealer sector, one should keep an eye on the price action of leader Goldman Sachs (NYSE:GS). The daily chart of GS, which is similar to both KCE and IAI, is shown below:

After a nice run earlier last month, then a gentle pullback over the past two weeks, to support of its developing uptrend line, it looks as though GS is poised to make another leg higher within its recovery uptrend. One might also notice GS is forming the right shoulder of a large, "inverse head and shoulders" pattern, which is bullish.

NOTE:The U.S. Markets are closed for the Good Friday holiday tomorrow, Friday, April 2. As such, The Wagner Daily will not be published that day. Regular publication will resume on Monday, April 5. Enjoy the long holiday weekend with your friends and family, and come back refreshed. Hopefully the market will be ready to actually do something then. :-)

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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