Stocks followed up Tuesday's sharp sell-off with a moderate bounce yesterday, but relative weakness in the tech arena held the Nasdaq in check. The major indices opened higher, then chopped around in indecisive fashion throughout the entire day. Even the afternoon Fed announcement on economic policy, which threw no surprises, had little bearing on the range-bound market action. The S&P 500 gained 0.6%, the Dow Jones Industrial Average advanced 0.5%, and the Nasdaq Composite was unchanged. Both the small-cap Russell 2000 and S&P Midcap 400 indices edged 0.2% higher. The S&P and Dow finished near the upper quarter of their intraday ranges; the laggard Nasdaq closed in the middle of the day's range.
Unfortunately for the bulls, higher turnover failed to accompany yesterday's bounce, leaving the advance unconfirmed by volume. Total volume in the NYSE was 14% lighter than the previous day's level, while volume in the Nasdaq receded 2%. Considering the high volume plunge of the previous session, it's not surprising that turnover ticker lower yesterday. However, this means the price to volume relationship of the broad market continues to favor the bears. For the past two weeks, the dominant theme has primarily consisted of lighter volume "up" days and higher volume "down" days. This, of course, is the opposite pattern of what traders would see in an overly healthy market.
For the past week, we've been observing the price action of Market Vectors Vietnam ETF (NYSEARCA:VNM), the first ETF to specifically target the Asian country of Vietnam. Because VNM has only been trading in the stock market since last August, it needed some time to build a price history that can be charted. Presently, price action is stable, and VNM has been oscillating in a sideways range for the past several months. Now, on a technical level, it is also setting up to break out above the upper channel resistance of that sideways range. If it does, it could present a valid buy entry that seeks to take advantage of a new, intermediate-term uptrend. The trade setup is shown on the daily chart of VNM below:
On Tuesday, after tumbling 2.3%, the S&P 500 closed below short-term support of its 20-day exponential moving average (NYSEMKT:EMA) for the first time in two months. As often occurs immediately following a big move in either direction, the broad market bounced the following day, but the 20-day EMA held the rally in check. Looking at the daliy chart below, notice how the S&P probed above the 20-day EMA on an intraday basis, but subsequently closed below it:
Previously acting as support, the 20-day EMA has now become a short-term resistance level to watch in the coming days. On an intraday basis, the S&P could easily probe above its 20-day EMA, but we're interested in whether or not the index manages to close back above that level. This is important because the ability or inability of the S&P 500 to quickly reclaim its 20-day EMA will likely determine the near-term bias of the broad market. If the index is unable to convincingly recover above its 20-day EMA, the negative price to volume patterns of the broad market lately could easily send the index down to its 50-day MA (the teal line). At that point, we would be looking for new, bullish setups of strongly trending ETFs that have pulled back to key support levels, thereby providing low-risk entry points.
Open ETF positions: |
Long - XLE, UNG
Short (including inversely correlated "short ETFs") - FAZ
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 firstname.lastname@example.org.
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