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A 200-day MA in play - September 14, 2010

|Includes: SPDR Gold Trust ETF (GLD), SPY

Stocks bagged their fourth straight day of gains yesterday, as each of the main stock market indexes moved back above support of its 200-day moving average. The broad market jumped sharply higher on the open, surrendered mucch of its gains with a mid-day sell-off, then worked its way back up in the final ninety minutes of trading. The Nasdaq Composite climbed 1.9%, the S&P 500 1.1%, and the Dow Jones Industrial Average 0.8%. Small-cap stocks clearly exhibited relative strength, as the Russell 2000 Index jumped 2.5%. The S&P Midcap 400 finished 1.7% higher. The major indices closed just above the upper quarter of their intraday ranges.

One of the most positive aspects of yesterday's solid advance was the higher volume that accompanied the rally. Turnover in the NYSE surged 24% above the previous day's level, while volume in the Nasdaq similarly ticked 17% higher. The broad-based, higher volume gains enabled both the S&P and Nasdaq to register a bullish "accumulation day," indicative of buying amongst mutual funds, hedge funds, and other institutions. Nevertheless, despite the increased trade, turnover in the Nasdaq still failed to exceed its 50-day average level.

SPDR Gold Trust (NYSEARCA:GLD), a popular ETF proxy for the price of spot gold futures, has formed an interesting pattern that could lead to a bearish reversal of trend in the near-term. Take a look at the daily chart of GLD:

GLD

The dashed horizontal line marks resistance of the all-time high of GLD, at the $123.50 area. After running into that level of price resistance on September 8, GLD began backing off. Though the ETF has not yet retraced very far from its high, the low of the past three days has become a key area of short-term support. If GLD breaks below that level, it will correlate to a breakdown below the 20-day EMA as well. As such, a break below the 3-day low could present a short-side trading opportunity.

Initially, it would be best to view the GLD setup as a trade with a near-term time frame, but it could develop into a longer holding period if the 50-day MA fails to hold support. Perhaps most important about this setup is the importance of not "jumping the gun" with a pre-mature entry point before GLD actually breaks down below its three-day low. Since GLD is still pretty near its high, it would only take one day of solid gains for the ETF to zoom back up. However, odds of a more substantial retracement would be much higher if GLD convincingly slides below near-term support of its three-day low and 20-day EMA.

On a technical level, yesterday's action was notable for the broad market. For starters, all the major indices reclaimed support of their 200-day moving averages, a closely-watched indicator of long-term trend. However, the breakout above the 200-day moving averages caused several of the main stock market indexes to close right at major horizontal price resistance levels. The positive breakout above the 200-day moving average, but the finish at resistance of the trading-range highs, is annotated on the daily chart of the S&P 500 SPDR (NYSEARCA:SPY):

SPY

After falling below its 200-day MA in May of this year, SPY popped back above that level the following month, but was unable to hold. The inability to hold above the 200-day MA sparked selling pressure that sent the ETF down to a new low in late June. Still, one month later, SPY had recovered back to test resistance of its 200-day MA, near the end of July. Again, after staying above its 200-day MA for less than two weeks, SPY fell back down, setting off a short-term downtrend that dominated most of August. Now, for the third time in as many months, SPY has again reclaimed its 200-day MA, and will be attempting to hold above it over the next one to two weeks.

As for the horizontal price resistance we mentioned (the dashed horizontal line on the chart above), it was simply formed by each failed attempt to move above the 200-day MA in recent months. Over the next few days, traders' eyes will be on this pivotal area of resistance, just above yesterday's high. This could lead to higher than usual volatility, along with a tug-of-war, as the bulls and bears battle for dominance at this pivotal resistance level in the broad market. Obviously, we have no way of knowing if this resistance level will remain intact this time around, but one thing seems more certain -- placing aggressive bets on the long side of the market at current price levels carries a low overall reward-risk ratio. If, however, stocks convincingly break out of the four-month trading range, we will subsequently look for new long entries on the first pullback.


Open ETF positions:

Long - DBA, TUR, UUP, EMB
Short (including inversely correlated "short ETFs") - SSG
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 DBA, Long TUR, Long UUP, Long EMB, Short SSG