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The chopfest continues - April 30

Keeping traders on their toes, stocks raced back to near their recent highs yesterday, enabling the major indices to recover a majority of their April 27 losses. The broad market gapped higher on the open, built on its gains as the morning progressed, then drifted in a sideways range throughout the afternoon. This time, the Nasdaq showed relative strength, as higher volume accompanied the rally as well. The Nasdaq Composite rose 1.6%, the S&P 500 1.3%, and the Dow Jones Industrial Average 1.1%. The small-cap Russell 2000 and S&P Midcap 400 indices climbed 2.1% and 1.5% respectively. The main stock market indexes closed in the upper twenty percent of their intraday ranges.

Total volume in the NYSE was 2% lighter than the previous day's level, but turnover in the Nasdaq increased 9%. The higher volume gains in the Nasdaq enabled the index to score a bullish "accumulation day," pointing to buying amongst mutual funds, hedge funds, and other institutions. Given the market's recent pattern of lighter volume gains and higher volume losses, yesterday's accumulation in the Nasdaq was an encouraging sign. Although trade was slower in the NYSE, advancing volume exceeded declining volume by a healthy margin of nearly 4 to 1. The Nasdaq adv/dec volume ratio was positive by just under 2 to 1.

In yesterday's commentary, we discussed the importance of the S&P 500's 20-day exponential moving average (NYSEMKT:EMA) as an indicator of short-term trend. Specifically, we said, " ...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." Obviously, yesterday's substantial gain pushed the S&P 500 back above its 20-day EMA, and by a wide margin. Nevertheless, resistance of the recent highs still remain a point of contention, one that can only convincingly be tackled by a solid round of institutional buying. Overall, the broad market has merely become a "chopfest" over the past two weeks, which has been making it more challenging than usual to maintain positions on either side of the market. Below, the hourly chart interval of the S&P 500 shows how volatile and non-committal recent price action has been:

SPX

As the chart above illustrates, broad market trading over the past several weeks resembles a roller coaster ride. Going into yesterday, the "bear flag" pattern of April 28, combined with the heavy distribution of April 27, had a good chance of leading to downside trend follow-through, at least in the short-term. But a strong rally came instead, causing the S&P to move back up into "no man's land," stuck between resistance of its recent highs and support of its 20-day EMA and recent lows.

Yesterday, we closed three open positions in our model ETF portfolio. UltraShort Financial ProShares (NYSEARCA:FAZ), which we bought when it attempted to reverse its short-term downtrend by rallying above its "swing high" and 20-day EMA, retraced nearly all of the week's gain, causing our stop to be triggered when it pulled back more than two-thirds of the way off its April 27 high. U.S. Natural Gas Fund (NYSEARCA:UNG) was another setup to take advantage of a short-term trend reversal, but was a bullish (non-inverse) position. UNG plunged yesterday afternoon, after the weekly inventory report came in greater than expectations. Massive volume accompanied the sell-off, which took UNG back to the lower channel support of its four-week consolidation. Finally, we closed our long position in S&P Energy SPDR (NYSEARCA:XLE) due to major relative weakness of several stocks in the energy sector (RIG and CAM). News of the leaking oil rig in the Gulf of Mexico is apparently wreaking havoc with several energy stocks. Of the three positions, only UNG was closed with nearly a full-sized loss. FAZ was only about half our normal loss, as we trailed the stop higher after it broke out a few days ago. XLE was a scratch because we sold at our pullback entry price.

Now that we've closed three positions, our model portfolio for The Wagner Daily is back to 100% cash. Given the recent action illustrated on the chart above, that's probably a good thing. Even though our positions consisted of one long, one short, and one non-correlated ETF, we were unable to stay with any of them. But that's okay because losing trades are simply part of the business. Still, we're just not in a hurry to jump back into the market until the major indices make a decisive move out of their choppy trading ranges of the past few weeks. Since today is the last day of the month, we will enter May with a clean slate, ready to take advantage of the next ideal opportunities, after the market finally makes up its mind.


Open ETF positions:

Long - (none)
Short (including inversely correlated "short ETFs") - (none)
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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