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Stalking Market Vectors Gold Miners (GDX) for short entry- July 2, 2010

|Includes: GDX, GLD, UNG, The United States Oil ETF, LP (USO)

Bearish momentum continued gripping the market, as stocks suffered another day of losses across the board. However, afternoon buying interest significantly trimmed the session's losses, and hinted at a potential near-term bounce in the coming days. The S&P 500 slipped 0.3%. Both the Dow Jones Industrial Average and Nasdaq Composite lost 0.4%. The small-cap Russell 2000 and S&P Midcap 400 indices declined 0.8% and 0.6% respectively. All the main stock market indexes closed around the upper third of their intraday ranges. Although the indices still closed below the day's opening highs, they finished near the top of their tight afternoon consolidations.

Turnover jumped yesterday, indicating institutions were busy behind the scenes. Total volume in the NYSE increased 13%, while volume in the Nasdaq was 22% higher than the previous day's level. In both exchanges, volume registered above 50-day average levels. When the stock market is in an uptrend, losses on higher volume ("distribution days") are negative, as they point to institutional selling that typically precedes a substantial market correction. However, when stocks have been selling off so sharply that they are in "oversold" territory, higher volume can actually be a sign of stealth institutional accumulation as the rest of the retail investors finally give up and sell their losing positions. This is especially true when the major indices decline on higher volume, but close near their intraday highs. As such, we view yesterday's higher volume losses as a neutral to slightly bullish signal, at least for the very near-term.

In yesterday's commentary, we pointed out the bearish pattern of U.S. Oil Fund (NYSEARCA:USO), and said it could move sharply lower if it broke below the June 30 low. Gapping lower on yesterday's open, that's what happened, as USO slid 3.2% yesterday. Nevertheless, although we saw the bearish follow-through we were anticipating, we made a judgment call to take profits on our USO short position yesterday. With an ETF just starting to move lower after the market has already been getting killed, we felt USO was now "out of sync" with the broad market. In other words, any decent bounce in the broad market, which is likely to happen soon, could cause USO to quickly move back up. There was also a level of prior support that USO had fallen to. As such, we decided to just lock in a gain of 2.4 points, rather than risking sitting through another bounce in the market while on the short side. Our exit price is shown on the daily chart of USO below:

USO

One of yesterday's top performing ETFs was U.S. Natural Gas Fund (NYSEARCA:UNG), which leapt nearly 5% for the session. On June 29, UNG neatly retraced to support of its 50-day moving average, which also coincided with horizontal price support of the prior breakout level on the daily chart. With such a convergence of major support levels, it's not wonder buyers returned to the scene just two days later, driving UNG sharply higher. The chart below is a good example of the power of the 50-day moving average as an intermediate-term trend indicator:

UNG

UNG gave back a bit of its intraday gain yesterday afternoon, but still closed back above its 20-day exponential moving average (the beige line on the chart above). Over the next week, look for UNG to rally back to its prior highs from mid-June. Resistance of the 200-day moving average (the orange line) is just above the June highs, and may cause a bit of deliberation in UNG. Still, we expect bullish momentum to push UNG to a new "higher high," thereby confirming an intermediate-term trend reversal in the ETF.

A swift reversal in sentiment for the gold commodity has started taking place, as SPDR Gold Trust (NYSEARCA:GLD) plunged 3.8% yesterday, and closed below its 50-day moving average for the first time in more than three months. In our June 28 commentary, we highlighted the pattern of GLD, which was consolidating near its highs and poised for a continuation breakout, and said the following: "If such a breakout occurs, short-term traders may be able to profit from momentum of a quick, upward surge, but a tight stop below the breakout level is still recommended, just to protect against another failed breakout (which would not be surprising in this environment)." Indeed, the breakout failed, as GLD probed just a few cents above the high of its consolidation on June 28, then reversed sharply lower intraday. Now, just three days later, GLD is positioned for a substantial correction off its highs. Take a look at the daily chart, noting the high volume that accompanied yesterday's breakdown below the 50-day MA:

GLD

Since a prior level of support becomes new resistance after the support is broken, a bounce up to the 50-day moving average may provide a low-risk short selling opportunity in GLD, in anticipation of a substantial near-term correction. However, a better play may be found in Market Vectors Gold Miners (NYSEARCA:GDX), which has been showing relative weakness to GLD. Unlike GLD, which follows the price of the spot gold commodity, GDX, which is comprised of a basket of individual gold mining stocks, never broke out above its year 2008 highs two months ago. GDX also lagged behind GLD throughout the month of June. As with GLD, a bounce into the vicinity of the 50-day moving average provides an ideal short entry point for GDX, whose daily chart is shown below:

GDX

Last month, we were already short GDX, but it hit our stop price in mid-June, knocking us out of the trade with a loss. Apparently, we were a few weeks too early for the trade. However, the short trade setup now looks much better, as the reversal of momentum has been confirmed. As such, we're stalking GDX for potential re-entry on the short side, if it bounces to provide us with a low-risk entry point. Re-entering a trade at a worse price than where the previous trade was closed is something novice traders sometimes hesitate to do. But the reality is our most profitable trades are often trade re-entries after getting stopped out on the first attempt. This is because all the other traders who had the same idea are already washed out of the trade, and most don't get back in. This eliminates overhead supply or demand, and enables the trade to more easily move in the originally anticipated direction. Regular subscribers to The Wagner Daily should note our detailed trigger, stop, and target prices for the GDX setup below.

NOTE: In observance of Independence Day, The Wagner Daily will not be published on Monday, July 5. Regular publication will resume on Tuesday, July 6. Have a great holiday weekend!


Today's Watchlist:



Market Vectors Gold Miners (GDX)

Short

Shares = 250
Trigger = $50.75 limit (bounce that probes just above the 50-day MA)
Stop = $53.30 (beyond 61.8% Fibonacci retracement from June 28 high to the July 1 low)
Target = $44.30 ("undercut" of major support from April lows)
Dividend Date = n/a

Notes = See commentary above for explanation of the setup. Since we don't know how high (or if) GDX will bounce, the trigger price is subject to change. But unless an Intraday Trade Alert is received with an updated price, assume the limit price of $50.75 is the intended short entry price.

Be aware this ETF may be on your broker's "hard to borrow" list, which means your brokerage firm's web site may initially tell you that shares are not available for shorting. If this occurs, we recommend you phone your broker and specifically ask them to locate shares of this ETF to borrow for short selling. With a little push, your firm should easily be able to call around and get shares for you within a matter of minutes. If not, consider switching to a different firm who offers a wider selection of stocks and ETFs for shorting. Just a little tip for subscribers who run into this issue.


Open ETF positions:

Long - TLT, UNG, UUP, DBA
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.



DISCLAIMER: There is a risk for substantial losses trading securities and commodities. This material is for information purposes only and should not be construed as an offer or solicitation of an offer to buy or sell any securities. Morpheus Trading, LLC (hereinafter "The Company") is not a licensed broker, broker-dealer, market maker, investment banker, investment advisor, analyst or underwriter. This discussion contains forward-looking statements that involve risks and uncertainties. A stock's actual results could differ materially from descriptions given. The companies discussed in this report have not approved any statements made by The Company. Please consult a broker or financial planner before purchasing or selling any securities discussed in The Wagner Daily (hereinafter "The Newsletter"). The Company has not been compensated by any of the companies listed herein, or by their affiliates, agents, officers or employees for the preparation and distribution of any materials in The Newsletter. The Company and/or its affiliates, officers, directors and employees may or may not buy, sell or have positions in the securities discussed in The Newsletter and may profit in the event the shares of the companies discussed in The Newsletter rise or fall in value. Past performance never guarantees future results.

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Reproduction without permission is strictly prohibited.


Disclosure: Long TLT, Long UNG, Long UUP, Long DBA