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Bullish short-term trend reversal- June 16, 2010

|Includes: iShares Cohen & Steers REIT ETF (ICF), IYT, UGA, XRT

Stocks gapped up on the open and never looked back, as the major averages steadily pushed higher the entire session to score impressive gains across the board. We typically see strong trend days occur when the majority of investors are caught wrong footed, which may have been the case after Monday's ugly reversal action in to the close. The strong trend day was the first clear sign of professional buying in the market since the June 2 accumulation day in the Nasdaq Composite. The Nasdaq Composite led the charge with a 2.8% gain, followed by the small-cap Russell 2000 at 2.6%. The S&P Midcap 400 and S&P 500 both advanced 2.4%. The Dow Jones Industrial Average added 2.1%. All the major indices closed at/near the highs of the day.

Turnover surged 22% on the Nasdadq and 2% on the NYSE. The higher volume gains allowed both the Nasdaq Composite and the S&P 500 to register bullish accumulation days. The strong price action was confirmed by bullish internals. Nasdaq advancing volume beat declining volume by a solid 7 to 1 margin, while NYSE a/d volume closed at an impressive 23 to 1.

The chart below shows the bullish accumulation day in the Nasdaq:


The surge in Nasdaq volume is a positive sign for the market, as it shows strong institutional demand for high flying tech stocks that usually lead the market higher when we are in rally mode. Here are a few leadership stocks to monitor over the next few weeks: BIDU, AAPL, CSTR, APKT, NFLX, THOR, ARUN, SNDK, AKAM, OVTI, RBCN, and FFIV. If these stocks continue to advance on bullish price and volume action, then the market should continue to trend higher.

Though the Nasdaq is showing the better price and volume action, we do see pockets of relative strength on the "big board" (NYSE). The iShares Cohen & Steers REIT Index (BATS:ICF) is already trading back above its 50-day moving average. Notice the relative strength line has already broken out to new highs ahead of the price action on the chart below, which is bullish. We don't like ICF as buy right here, but we'll keep an eye on the action for a pullback entry at or near the 50-day moving average.


Another relatively strong performer is the iShares Transportation Index (BATS:IYT). The relative strength line in IYT has broken out to new highs well ahead of the price (just like ICF). Since IYT is straight up off the lows, we are waiting for a pullback or tight range to develop at or near the 50-day moving average to locate a low-risk buy entry.


One potentially actionable buy setup is in the SPDR S&P Retail (NYSEARCA:XRT), which cleared its downtrend line and the 20-day EMA this week. If the rally in the broad market gets going, then XRT shouldn't have much trouble pushing through the 50-day moving average. A logical exit would be at or near the prior highs around the 44.50 to 45.00 level. In terms of relative strength, XRT has held up much better than RTH and is the clear choice for establishing exposure in the retail sector.


On the short side, the U.S. Oil Fund (NYSEARCA:USO) and United States Gasoline Fund (NYSEARCA:UGA) are potential short entries as they bounce into logical areas of resistance. We covered USO in yesterday's report, so let's go over the potential short setup in the UGA. UGA is wedging higher after a false breakdown below the prior swing lows around 33.00. Usually there is some sort of stop run after an obvious breakdown to shakeout all the late to the party shorts. We look for a move to the 50-day and 200-day MA's that converge around 35.50 as a strong area of resistance.


In yesterday's report we mentioned that new long entries should be entered with a very short-term time horizon unless higher volume gains ("accumulation") start coming into the market this week. Tuesday's strong accumulation day signals that the market may be ready to stage a meaningful advance, especially if we see another day of heavy volume accumulation.

Open ETF positions:

Long - UNG, THD
Short (including inversely correlated "short ETFs") - GDX
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 UNG, Long THD, Short GDX