After a moderate gap up on the open, stocks quickly reversed and sold off sharply through the morning session. By noon, most major averages were down 2% or more from the intraday high on a significant pick up in volume. Though the morning breakdown was quite convincing, stocks stabilized and staged a decent comeback in the afternoon before running into some selling in the final hour of trading. Overall, the afternoon rally was a bit of a confidence booster for the bulls, as there clearly was some buying interest on weakness. The small-cap Russell 2000 nearly finished in positive territory, down just 0.1% after bouncing off the 200-day moving average. The Dow Jones Industrial Average gave back 0.3%. The S&P 500 closed down 0.4%, with the S&P 400 and Nasdaq Composite right behind at 0.5% and 0.6% respectively. Most averages closed just below the mid-point of the day's range, but well off the lows of the day.
Turnover picked up considerably across the board. NYSE volume ran 17% over the prior days pace, while Nasdaq volume jumped 26% higher. Thursday's higher volume losses produced another distribution day for the Nasdaq and S&P 500. Market internals closed at average levels, with down volume beating up volume by 2 to 1 on the Nasdaq and 1.2 to 1 on the NYSE. Though today's action was technically a distribution day, we are not comfortable saying it was an overly bearish day, as both the bears and bulls had their time to shine.
PowerShares U.S. Dollar Bull Index (NYSEARCA:UUP) is back on our watchlist this week as it approaches support of the 200-day moving average on the daily chart below:
There is major horizontal price support from February to April (not shown on the chart above). The weekly chart shows UUP doing a Fibo retracement of just over 50%, thereby providing a positive reward-risk ratio (fibo measure from December 2009 low to June 2010 high). Furthermore, the Euro (NYSEARCA:FXE) is rallying into a major area of horizontal price resistance, so it's likely to start resuming its downtrend again soon. This setup is for the intermediate to long-term trader, as there isn't enough positive price momentum for the short-term trader to go long right now.
Earlier this week we mentioned a few emerging market ETFs that we are monitoring for potential pullback entries. After breaking out to new highs, iShares Thailand (NYSEARCA:THD) is now in pullback mode:
The pullback buy zone in THD is around the 48.00 - 49.00 area, where support from the downtrend line, the rising 20-day EMA, and the prior highs are clustered together. Look for a potential undercut of the 20-day EMA as a low risk entry point next week.
Sticking with the emerging market theme, iShares Chile (BATS:ECH) is also showing a ton of relative strength vs the S&P 500 and is also in pullback mode after a strong breakout to new highs last week. A correction to the rising 20-day EMA would be an ideal, low risk entry point.
The 200-day moving average remains a brick wall of resistance on the daily chart of the S&P 500 below:
Although the major averages climbed back above their 50-day moving averages last week, we have yet to see a second wave of strong, follow through buying to indicate that the market is ready to stage a meaningful rally. Until the S&P 500 clears the 200-day moving average we expect more of the same wide and choppy price action.
Open ETF positions: |
Long - DBA, UNG, TLT
Short (including inversely correlated "short ETFs") - GDX
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 email@example.com.
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Disclosure: Long DBA, Long UNG, Long TLT, Short GDX