Stocks took a breather yesterday, as the major indices consolidated in a tight range throughout the session before settling near the flat line. Showing a bit of relative strength, the Nasdaq Composite edged 0.3% higher, bringing its winning streak to seven consecutive days. However, both the S&P 500 and Dow Jones Industrial Average were unchanged. The small-cap Russell 2000 and S&P Midcap 400 indices slipped 0.4% and 0.2% respectively. All the major indices closed just above the middle of their relatively narrow intraday trading ranges.
Total volume in both the NYSE and Nasdaq was 6% lighter than the previous day's levels. Considering it was a consolidation day, it was positive that turnover receded in both exchanges. Conversely, higher volume with minimal price movement would have pointed to stealth institutional selling into strength. Instead, the bulls simply took a rest from their recent buying operations.
Although the main stock market indexes are apparently stuck in a wide trading range (as detailed in yesterday's commentary), price action is slowly improving, and stocks are starting to show signs of institutional accumulation. As such, it may be wise to start targeting a list of ETFs with relative strength, which can be bought on the next pullback in the broad market. Since the major indices are still well below their June highs, a quick and easy way to spot ETFs with relative strength is to seek those which are already at or above their June highs. Such ETFs could be showing leadership, positioned to outperform subsequent gains in the broad market. They would also have a chance of holding up better than the major indices in the event of sudden weakness. In addition to ETFs trading above their June highs, it's even better if those June highs were already near their 52-week highs, as opposed to the main stock market indexes, in which the June highs are still well below their April and May highs.
Upon scanning for the criteria mentioned above, only a handful of ETFs are exhibiting such qualities. Most are international ETFs, rather than industry sector ETFs. Market Vectors Brazil Small-Cap (NYSEARCA:BRF) is one such ETF. The daily chart is shown below:
Presently, BRF is consolidating in a narrow, sideways range, as it tests resistance of its June highs. Below, the 20, 50, and 200-day moving averages are all acting as support, rather than overhead resistance. Additionally, a convincing breakout above its June highs would probably cause BRF to break out above the multi-month base of consolidation from April and May as well, marked by the dashed horizontal line. We like BRF for partial buy entry above its July 9 high of $46.80. The remaining shares could be added on a breakout above the $47.60 area (over the April/May highs).
Another international ETF clearly showing relative strength to the U.S. markets is Market Vectors Indonesia (NYSEARCA:IDX). Take a look:
Like BRF, IDX is now testing resistance of its June high, which coincides with resistance of the prior highs from April and May. However, IDX is technically a stronger chart pattern than BRF, as a breakout above its recent highs would be a fresh all-time high. BRF, on the other hand, still has a bit of resistance from its all-time high that was set in January 2010. To reduce the odds of a failed breakout, we ideally would like to see IDX confirm its relative strength by holding intact near its highs, while the main stock market indexes pull back. If it does, we will probably buy it. Regular subscribers to The Wagner Daily should be on the lookout for an Intraday Trade Alert with detailed trigger, stop, and target prices in the event of an IDX entry.
Finally, iShares Singapore Index (NYSEARCA:EWS) is another international ETF to monitor. Though it is still below its April 2010 high, EWS has already rallied above its June high. Showing substantial relative strength to the S&P, Nasdaq, and Dow, EWS could be bought on a pullback to support of its 20-day EMA, circled in pink on the daily chart below:
In yesterday's commentary, we illustrated that each of the major indices have rallied into pivotal overhead resistance levels. Specifically, the S&P 500 had bumped into its 50-day moving average, the Dow closed right at its 200-day moving average, and the Nasdaq Composite was trading just a few points shy of the convergence point of its 50 and 200-day moving averages. Since both the S&P and Dow were flat yesterday, and the Nasdaq rose only slightly, the same critical tests of resistance remain intact going into today's session. Furthermore, yesterday was an "inside day," meaning the intraday trading ranges of the major indices were contained within the respective intraday highs and lows of the previous day's session. As such, yesterday's action was essentially a non-event. But with quarterly earnings reason kicking into high gear over the next week, higher than usual volatility will likely be the dominant theme.
Open ETF positions: |
Long - DBA, TLT, UNG
Short (including inversely correlated "short ETFs") - GDX, IYR
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 firstname.lastname@example.org.
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.
Charts created by TradeStation (tradestation.com).
© 2002-2010 Morpheus Trading, LLC
Reproduction without permission is strictly prohibited.
Disclosure: Long DBA, Long TLT, Long UNG, Short GDX, Short, IYR