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An ugly close to the first half of the year- July 1, 2010

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

After testing critical support levels the previous day, the major indices bounced in the first half hour of yesterday's trading, but that's all the momentum stocks could muster. After a few hours of choppy action, the selling intensified late in the day, as stocks rolled over to new intraday lows with most averages dropping 1.0% or more in the final hour of trading. The S&P Midcap 400 lost 0.8%. The Dow Jones Industrial Average and S&P 500 both gave back 1.0%. The small-cap Russell 2000 and Nasdaq Composite fell 1.1% and 1.2% respectively. All major averages closed near the lows of the session and in the bottom 10% of the day's range.

Turnover fell short of Tuesday's heavy pace on both exchanges. NYSE volume declined by 12%, while Nasdaq volume dropped 22%. At this point we really do not need higher volume to confirm down days, as the broad market averages are clearly under distribution. Market internals settled down to more normal levels with declining volume beating advancing volume by a 2.5 to 1 margin on the NYSE. Nasdaq adv/dec ratio was slightly worse at a negative 4.5 to 1.

Our long position in iShares 20+ Year Treasury Bond (NYSEARCA:TLT) has worked out well over the past few days:

Our TLT buy entry is now in the money with the strong breakout action of the past two days. Although the volume hasn't been explosive it has picked up on the breakout.

Our Powershares US Dollar (NYSEARCA:UUP) long position is holding support at the upward sloping 50-day moving average. The price action is currently sandwiched between the 20-day and 50-day MA's. A breakout above the 20-day EMA and the two-day high should spark a rally that tests the prior high around the 25.60 to 25.80 area.

United Stated Oil Fund (NYSEARCA:USO) is just barely holding on to support at the 34.00 level with yesterday's reversal bar action. A break of yesterday's low should spark a selloff that tests the 31.00 - 32.00 area at the very least.

In the charts to watch category we have a few country-based ETFs that are trading near their 52-week highs.

iShares Thailand (NYSEARCA:THD) weekly chart:

Intermediate to long-term traders should keep an eye on THD as a potential buy once the broad market settles down. So far the action looks pretty tight on the weekly chart, as it continues to build a solid base in the 42.00 to 49.00 range. It's easy to spot the great relative strength in THD, as the relative strength line has already broken out to new highs well ahead of the price action. The 10-week moving average is just below and should provide support over the next few weeks. There is nothing to do right now but monitor the price action.

iShares Chile (NYSEARCA:ECH) weekly chart:

ECH has formed a tight, five month base of consolidation near the highs. It bounced off support of the 200-day moving average in May and has pushed back through the 10-week moving average on the chart above. Its relative strength line has also broken out to new highs well ahead of the price action. Like THD, let's see if the price action can hold support at the 10-week MA while the broad market sells off. There is nothing to do now but monitor the price action.


Open ETF positions:

Long - UNG, TLT, UUP, DBA
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 UNG, Long TLT, Long UUP, Long DBA, Short USO