September 23, 2010
After opening slightly lower yesterday morning, the major indices reversed into positive territory in the first twenty minutes of trading, but the buying interest was short-lived. Stocks headed back down and trended lower throughout the morning session, stabilized at midday, then drifted sideways for the rest of the session. All the main stock market indexes closed in the red, but the losses were moderate. The Dow Jones Industrial Average slipped 0.2%, the S&P 500 0.5%, and the Nasdaq Composite 0.6%. Small and mid-cap stocks exhibited a bit of relative weakness. The Russell 2000 and S&P MidCap 400 indices lost 1.2% and 0.8% respectively. Like the previous day, each of the major indices closed in the bottom third of its intraday range.
Although the broad market declined for a second straight day, this time it did so on lighter turnover. Total volume in the NYSE eased 9%, while volume in the Nasdaq was 3% lower than the previous day's level. The slower pace of trade means institutions were not active participants in yesterday's selling. Market internals were negative, but not by an overly wide margin. In both exchanges, declining volume exceeded advancing volume by a ratio of just over 2 to 1.
Yesterday, we made three trades in our model ETF portfolio, via Intraday Trade Alerts to regular subscribers of The Wagner Daily, each with a low correlation to the direction of the broad market. First, we added to our existing position in Emerging Markets Bond Fund (NYSEARCA:EMB). As discussed in yesterday's commentary, we liked EMB for buy entry on a rally above the September 16 high of $109.82. That move came yesterday, and we simply added additional shares to our existing position when EMB rose above that trigger price.
The next trade we made was a new long entry into iPath S&P 500 VIX Mid-Term Futures (NYSEARCA:VXZ). The daily chart of VXZ below illustrates the setup:
As an ETF proxy for the well-known CBOE Volatility Index (the "fear gauge"), VXZ generally moves in the opposite direction of the stock market. However, even though the major indices have a moving higher for the past two weeks, notice that VXZ has merely been trading in a tight, sideways range during the same period. This indicates VXZ is actually showing a bit of relative strength, and has apparently found solid support. Therefore, it should only require a slight pullback in the broad market, or even just a bit of price consolidation, in order for VXZ to bounce higher. We initially pointed on this potential trade just over a week ago, when VXZ first pulled back to approach lower channel support of its four-month "pennant" formation. But at the time, we were waiting for some sign of bullish confirmation before buying the retracement to support. Such confirmation came yesterday, when VXZ broke out above its hourly downtrend line and moved above its 40-period moving average on the same chart. Drilling down to the shorter-term hourly chart, one can see the reason for the timing behind yesterday's entry:
The third trade we entered yesterday was a long entry into the inversely correlated ProShares UltraShort Yen (NYSEARCA:YCS). We have discussed this setup several times over the past week, as a near to intermediate-term trend reversal play. On September 15, YCS had a huge gap up above resistance of its daily downtrend line, while volume also surged to nearly 4 times its average daily level that day. After consolidating for a couple days, VXZ pulled back to just above new support of its prior downtrend line yesterday, thereby providing us with a favorable reward/risk ratio for trade entry. The entry is shown on the daily chart of YCS below:
Yesterday's losses in the broad market caused the S&P 500 Index, as well as several other major indices, to close right at support of the index's breakout above the August highs. So far, this is constructive price action, as no technical damage was done. Like we said in yesterday's commentary, "At the least, one should be prepared for a period of price consolidation ('correction by time') for at least a week or two." As long as the main stock market indexes hold above their recent breakout levels, a bit of price consolidation is indeed a likely scenario. Nevertheless, it may be better to focus on specific ETFs with relative strength or weakness to the overall stock market, rather than trading breakouts in the broad-based ETFs.
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).
Â© 2002-2010 Morpheus Trading, LLC
Reproduction without permission is strictly prohibited.