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Short-term holding pattern- June 18, 2010

|Includes: SMH, The United States Gasoline ETF, LP (UGA), XRT

Broad based averages sold off 1% or more from the open during the first hour of trading and undercut the prior day's low before finding support. Stocks then recovered through the early afternoon but were once again put under pressure after 2:00 pm. A strong bounce in the final half hour of trading allowed the majority of indices to close in positive territory. Overall, it was a constructive day for the bulls, as they were able to fight off two intraday selloffs and close strong. The Dow Jones Industrial Average finsihed up 0.2%. Both the S&P 500 and Nasdaq Composite closed slightly higher at 0.1%. The small-cap Russell 2000 lost only 0.03%, while the S&P Midcap 400 pulled back 0.2%.

Turnover was higher during the first hour of trading but eased off throughout the rest of the day. By the close, both Nasdaq and NYSE volume totals had fallen off the prior day's pace, which was a positive sign for the bulls (Nasdaq volume dropped 7% vs 2% on the NYSE). The current rally will have a good chance of sticking as long as the major averages continue to consolidate or retreat on lighter volume.

The past two days of consolidation in the major averages has created a few "lines in the sand" in the short-term. A move below the two-day low could spark a pullback that tests the 20-day exponential moving average or the 200-day moving average. However, a move above the two-day high would most likely result in a test of the 50-day moving average within the next few days.

As mentioned in Tuesday's report, UGA is setting up on the short side:

UGA probed above resistance of its 50-day and 200-day moving averages. There is also resistance from the 50% Fibo level (at 35.50) measured from 5/3 high to 5/25 low. Momentum from the counter trend rally may carry UGA higher for a few more days, but we should see the bears regain control shortly. UGA is shortable in to strength (around the 35.50 - 36.00 area) with a wide stop, or on a breakdown below the 200-day MA.

Our scans haven't turned up many high quality setups with attractive reward/risk ratios as of late. If the current uptrend continues to develop, then we should eventually see new patterns emerge. For now we are keeping an eye on the action in XRT, which we think is beginning to form a tight range above the downtrend line:

Aggressive traders may wish to establish a small buy in XRT near the 39.00 - 39.50 area with the intention of adding more size if it can hold above the downtrend line and break above 41.00 next week.

In the constructive pattern department, we like the recent price action in the HOLDRS Semiconductor (NYSEARCA:SMH), as it is poised to close above its 10-week moving average for the first time in seven weeks. Note the strong support on the weekly chart, as the price action closed strong each time there was a dip below the 40-week moving average.

Open ETF positions:

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

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

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Disclosure: Long UNG, Long THD, Short USO