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All eyes on quarterly earnings season- July 12, 2010

|Includes: GDX, PowerShares DB USD Bull ETF (UUP)

Stocks wrapped up the holiday-shortened week with a fourth straight day of gains, but now must contend with an abundance of overhead supply and resistance levels in the coming days. Last Friday, the broad market spent most of the session drifting in a sideways range, then edged higher in the final hour of trading. The Nasdaq Composite gained 1.0%, the S&P 500 0.7%, and the Dow Jones Industrial Average 0.6%. Small and mid-caps showed relative strength, as they often do during recoveries off the lows. The Russell 2000 and S&P Midcap 400 indices advanced 1.5% and 1.0% respectively. All the main stock market indexes closed at their best levels of the day and week.

As was the case with all four days of last week's gains, turnover was lighter in both exchanges. Total volume in the NYSE eased 25%, while volume in the Nasdaq limped in 23% lighter than the previous day's level. In both exchanges, volume was well below 50-day average levels. When downtrending markets are bouncing off their lows, one of the most important elements to determining the longevity of a recovery is the volume that accompanies the rallies. Unfortunately for the bulls, declining volume in every one of last week's "up" days tells us mutual funds, hedge funds, and other market-moving institutions remain on the sidelines, and apparently are not yet convinced. Until that changes, we remain quite suspicious of the viability of a substantial market bottom presently being formed.

While the daily chart interval is typically the main timeframe used in our daily technical analysis, the longer-term weekly charts have the benefit of removing the noise, and enabling one to more clearly see the "big picture" of the dominant trend. Case in point is the current pattern of U.S. Dollar Bull Index (NYSEARCA:UUP). On the daily chart, it's easily apparent that UUP has been in pullback mode for the past month, and has fallen below support of its 50-day moving average. However, a quick glance at the weekly chart shows that UUP has retraced perfectly to support of its primary uptrend line, which has been in place all year. Take a look:

UUP

One elementary tenet of technical analysis is traders should always assume a firmly established trend will remain intact, until the price action proves otherwise. Furthermore, the longer a trend has been intact, the more likely the prevailing trend will continue. In the case of UUP, the uptrend on the weekly chart has been in place for approximately seven months. Conversely, the downtrend on the daily chart has only been in effect for just over a month. As such, there are greater odds of UUP bouncing off support of its weekly uptrend line and resuming its dominant uptrend than it continuing lower from here. Nevertheless, our protective stop is in place at the right level, below last week's low, just in case a major change of sentiment sets in.

Last Friday, Market Vectors Gold Miners (NYSEARCA:GDX) perfectly triggered our initial short entry point, as it bounced to probe above resistance of its 50-day moving average on an intraday basis, then closed below it. The "overcut" above the obvious level of resistance triggered buy stop orders for the bulls, and provided a positive reward-risk ratio for traders to initiate new short positions as well. Below is the daily chart of GDX:

GDX

The double top from last month's failed breakout (marked by the dashed horizontal line) has created a substantial amount of overhead supply. This should make it difficult for GDX to recover back above its 50-day moving average, which has now converged with resistance of its 20-day exponential moving average as well. If GDX breaks below last week's "swing low" support level, it will coincide with a break of the weekly uptrend line as well. If that occurs, an intermediate-term downtrend in GDX will likely develop, thereby benefiting our new short position in GDX. Helping to confirm the sudden reversal of sentiment is the pattern of SPDR Gold Trust (NYSEARCA:GLD), which failed several attempts to break out in June, then broke down on July 1.

Quarterly corporate earnings season officially kicks off today, with the release of the latest numbers from Alcoa (NYSE:AA) after the close. Along with a plethora of other companies, Intel (NASDAQ:INTC) reports tomorrow, JP Morgan Chase (NYSE:JPM) and Google (NASDAQ:GOOG) on Thursday, and Bank of America (NYSE:BAC) on Friday. Be prepared for higher than usual volatility, as the market reacts to and digests the initial batch of key numbers. If anything is to improve market sentiment enough to enable last week's rally to develop into more than just a bounce, a slew of better-than-expected earnings reports could do it. Nevertheless, most professional traders will be taking a "wait and see" approach before placing any big bets.

NOTE: Only an abbreviated version of The Wagner Daily, recapping open positions with any updates or changes, will be published tomorrow, July 13 (day 2 of maximum 7 abbreviated versions allowed per calendar year).


Open ETF positions:

Long - DBA, TLT, UUP, UNG
Short (including inversely correlated "short ETFs") - GDX, IYR
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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Disclosure: Long DBA, Long TLT, Long UUP, Long UNG, Short GDX, Short IYR