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U.S. Dollar Bull Index (UUP) undercuts its prior low- June 21, 2010

|Includes: iShares 20+ Year Treasury Bond ETF (TLT), UUP

The major indices edged higher in a lethargic session last Friday, capping off a second week of gains on the rebound off the May lows. Stocks drifted higher in the morning, slipped back down in the afternoon, then closed near the flat line. The Dow Jones Industrial Average rose 0.2%, as the S&P 500 and Nasdaq Composite registered identical gains of 0.1%. The small-cap Russell 2000 advanced 0.2%, but the S&P Midcap 400 dipped 0.1%. The main stock market indexes closed just below the middle of their tight intraday ranges.

Volume surged higher in last Friday's session, but the rise was likely attributed to "quadruple witching" day, the quarterly session in which stock index futures, single stock futures, stock options, and stock index options simultaneously expire. Total volume in the NYSE swelled 51%, while volume in the Nasdaq increased 12% above the previous day's level. As institutions jockey stocks towards their desired closing prices, turnover typically zooms higher across the board. Yet, despite the faster trade in the Nasdaq, volume in the exchange remained below its 50-day average level. Though stocks have been attempting to exhibit bullish price action since bouncing off their May lows, lighter than average volume levels indicate institutions primarily remain on the sidelines. Without the convincing participation of mutual funds, hedge funds, and other institutions, it's difficult to be confident of the market's current recovery attempt.

Like the overall stock market, iShares 20+ Year Treasury Bond Fund (NYSEARCA:TLT), as well as most of the other fixed-income (bond) ETFs, was quite volatile last month. But since then, volatility in TLT has calmed down, and the ETF has been oscillating in a range. This has led to the formation of a "pennant" pattern on its daily chart, which we have annotated on the graph below:

TLT

A "pennant" alone is neither bullish nor bearish. Rather, the pattern usually leads to a resumption of the dominant trend that preceded its formation. Since TLT was in a multi-month uptrend before the pennant formed, odds favor a resumption of that uptrend after TLT moves above the upper channel resistance of the pennant. Therefore, we're stalking TLT for potential long entry, and plan to buy on a rally above the June 17 high. This correlates to a breakout above the upper channel resistance of the pennant as well. As a bonus, TLT pays a substantial monthly dividend, like most of the bond ETFs, but the adjusted, ex-dividend pricing leads to a lower capital gain.

Several weeks ago, we said we were stalking U.S. Dollar Bull Index (NYSEARCA:UUP) for potential buy entry on an "undercut" of both its 20-day exponential moving average and prior swing low. Now, UUP is finally setting up to provide the entry point we were looking for. Take a look:

UUP

Buying a dip below an obvious level of support, such as the May 21 low, often provides a lower risk entry point than buying a breakout above resistance, especially in the current environment. As such, a pullback entry usually translates into a more positive reward-risk ratio as well. With UUP, we also like the rising 50-day moving average, which should provide solid support just below the current price level. Still, we would like to see a bit of confirmation that the low of the pullback has been reached. As such, we will wait for UUP to rally above its prior day's high ($24.98) before buying. Regular subscribers to The Wagner Daily should note our detailed trigger, stop, and target prices under "Today's Watchlist" below.

Depending on how one looks at it, one could legitimately argue recent price action in the broad market has either been bullish and constructive, or disappointing and in danger of rolling over again. At this stage, it's merely a matter of perspective. Over the past three days, the major indices have essentially been flat and consolidating in a tight, sideways range. Since stocks have moved back above their 20-day exponential moving averages, and even their long-term 200-day moving averages, bulls might suggest last week's narrow-range trading is merely a precursor the broad market making another leg higher. However, bears could point out the Nasdaq's struggle at overcoming resistance of its June 3 high since breaking out on higher volume four sessions ago. While the index formed a short-term "double bottom" on June 8, a subsequent "higher high" on the daily chart, necessary for at least a short-term trend reversal, has not yet been confirmed. Intermediate-term resistance of the declining 50-day moving average is also a key technical factor to be aware of. This is all illustrated on the daily chart of the Nasdaq Composite below:

COMPX

Going into this week, we assume a neutral near-term view, while maintaining a slightly bearish intermediate-term view. If the major indices convincingly surge through resistance of their 50-day moving averages, both our near-term and intermediate-term biases would change, and we have no problem doing so. However, since we focus on trading what we see, not what we think, it's difficult to must up much enthusiasm for the stock market as the major indices begin testing key resistance levels without much conviction. Until we see the market's next move, one might consider focusing on ETFs with a low correlation to broad market direction, such as commodity, currency, fixed-income, and select international ETFs, rather than most industry sector or broad-based ETFs. Presently, we're long one commodity ETF (NYSEARCA:UNG), short one commodity ETF (NYSEARCA:USO), and long one international ETF (NYSEARCA:THD). Both UNG and THD are showing unrealized gains, while USO is hanging out near our entry price. As per the commentary above, we're also stalking both UUP (a currency ETF) and TLT (a fixed-income ETF) for potential long entry this week.


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 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 UHD, Long THD, Short USO