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Don't get a case of market amnesia - April 15

|Includes: IAI, JPMorgan Chase & Co. (JPM), USD, UYM, XLV

Solid earnings reports from Herculean leading companies such as Intel Corp. (NASDAQ:INTC) and JP Morgan Chase (NYSE:JPM) ignited a broad-based surge in the market yesterday, as overall volume levels heated up as well. The major indices opened in positive territory, then trended steadily higher throughout the entire session. A 4.3% jump in the Philadelphia Semiconductor Index ($SOX) helped lift the Nasdaq Composite to an impressive 1.6% gain. Similarly, a 3.4% gain in the KBW Bank Index ($BKX) was a driving force behind the 1.1% gain of the S&P 500. The blue-chip Dow Jones Industrial Average rose 0.9%. Small-cap stocks showed relative strength, as the Russell 2000 cruised 2.2% higher. The S&P Midcap 400 rallied 1.5%. All the main stock market indexes closed at the top of their intraday ranges.

Volume swelled across the board, causing both the S&P 500 and Nasdaq to convincingly register a bullish "accumulation day." Total volume in the NYSE was 8% greater than the previous day's level, while turnover in the Nasdaq leapt 18%. In both exchanges, volume was squarely above 50-day average levels. Convincing displays of institutional buying activity have been rare lately, but yesterday certainly qualified as one such instance. Market internals were quite bullish, especially in the Nasdaq. In the NYSE, advancing volume outpaced declining volume by a margin of nearly 5 to 1. The Nasdaq adv/dec volume ratio was extremely positive, at a ratio of 9 to 1.

Aided by a high-volume breakout in JPM, our position in the iShares U.S. Broker-Dealer Index (NYSEARCA:IAI) rallied 2.1% yesterday. Acting well since our April 1 buy entry, IAI is now approaching resistance of its 52-week high, from last October. At the time of entry, this was our first approximate target price. Although the trade is now showing a nice unrealized gain, we'll let closely-monitored price action tell us when to take profits on the trade, rather than trying to call a top. It would only take another day or two of strength for IAI to break out to a fresh 52-week high. One aspect we really liked about this trade entered two weeks ago was how convergence of its daily uptrend line and support of the 20-day exponential moving average provided for such a low-risk entry point. Our entry point, as well as resistance of the 52-week high, is shown on the daily chart of IAI below:

IAI

When markets start to get overheated, pullback entries of ETFs with relative strength, such as IAI above, may provide traders with lower overall risk in the event of a broad market retracement. Conversely, breakout entries are still working too, but may be most ideal for much shorter time frames. In yesterday morning's Wagner Daily, for example, we suggested ProShares Ultra Semiconductors (NYSEARCA:USD) could be in play on a very short-term basis, driven by the earnings report from INTC. Specifically, we said, "If USD gaps open above yesterday's high, it could present a valid buy entry on the open (and). . .If USD gaps up and holds through the first hour of trading, odds are good it will continue higher as the day progresses." Below, the 5-minute intraday chart of USD shows the subsequent price action after the initial opening gap higher:

USD

Because this newsletter typically focuses on ETF trades with an average hold time of 1 - 3 weeks, not daytrades or two-day holds, we did not "officially" buy USD yesterday. However, we occasionally point out "unofficial" trade setups like USD for subscribers who are able to take advantage of very short holding periods. If you're one of those individuals, below is another chart you may want to monitor for breakout entry in today's session. Even if you're not a daytrader, the same concepts we teach for micro trade management apply to longer time frames as well:

UYM

If ProShares Ultra Basic Materials (NYSEARCA:UYM) triggers for buy entry by gapping above the short-term range annotated above, it could be proactively managed in a similar manner to USD -- buying the breakout with an initial stop just below the low of the first hour, then using the 20-EMA (on either the 5 or 15-minute chart) to trail the stop higher intraday. Keeping it overnight would also not be a bad idea if UYM closes in the upper third of its intraday range.

Going into yesterday, we were stalking S&P Healthcare SPDR (NYSEARCA:XLV) for potential buy entry above resistance of its hourly downtrend line. However, because the biggest movers were driven by key earnings reports in the Semiconductor and Financial sectors, the Healthcare industry showed no signs of life yesterday. Still, we'll keep XLV on our watchlist going into today because the reward-risk of this trade setup is so positive. Furthermore, even if the broad market were to suddenly pull back, the healthcare sector could show relative strength because it's typically considered "defensive" in nature.

As long as the trend remains up, and momentum clearly continues to favor the bulls, traders definitely should not argue with it. Yet, aggressively buying new positions at current levels, without properly planning for and respecting the possibility of a sudden, swift pullback, is a surefire way to give back hard-earned profits in the blink of an eye. Perhaps our overall thoughts of the current market environment are best summed up by an excerpt from our latest monthly report sent to our fund investors last night. We said, "This month, we remain positioned primarily on the long side of the market, as the trend remains up. However, because the major indices are now approaching major areas of resistance from their year 2008 highs (as illustrated in our April 12 commentary), we're now utilizing caution through tighter stop placement and slightly reduced position size. This should enable us to continue generating profits, but with little risk of sustaining a significant drawdown in the event of a pullback in the broad market. Based on the market's resilience of late, it's easy to forget that markets move both up and down, but forgetting this basic concept can have extremely damaging consequences (as many investors learned in 2008). Agreeing with our thought that it's easy to forget markets move in both directions, one Partner replied to say, "Amnesia appears to be nearing epidemic proportions." Indeed -- couldn't have said it better ourselves. Go with the bullish trend while it lasts, but keep your running shoes nearby, just in case you suddenly need to sprint to the exit door.

Open ETF positions:

Long - IAI
Short (including inversely correlated "short ETFs") - TBT, BRF
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.



DISCLAIMER: There is a risk for substantial losses trading securities and commodities. This material is for information purposes only and should not be construed as an offer or solicitation of an offer to buy or sell any securities. Morpheus Trading, LLC (hereinafter "The Company") is not a licensed broker, broker-dealer, market maker, investment banker, investment advisor, analyst or underwriter. This discussion contains forward-looking statements that involve risks and uncertainties. A stock's actual results could differ materially from descriptions given. The companies discussed in this report have not approved any statements made by The Company. Please consult a broker or financial planner before purchasing or selling any securities discussed in The Wagner Daily (hereinafter "The Newsletter"). The Company has not been compensated by any of the companies listed herein, or by their affiliates, agents, officers or employees for the preparation and distribution of any materials in The Newsletter. The Company and/or its affiliates, officers, directors and employees may or may not buy, sell or have positions in the securities discussed in The Newsletter and may profit in the event the shares of the companies discussed in The Newsletter rise or fall in value. Past performance never guarantees future results.

Charts created by TradeStation (tradestation.com).

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Disclosure: long IAI