A rather “blah” session of trading was the dominant theme yesterday, as the broad market grinded higher throughout the day, but without much conviction. The Nasdaq Composite advanced 0.4%, the Dow Jones Industrial Average 0.3%, and the S&P 500 0.2%. The S&P marginally set a new 52-week closing high by just one point; the Nasdaq remained below its prior closing high by less than a point. The small-cap Russell 2000 and S&P Midcap 400 indices eked out gains of 0.4% and 0.2% respectively. With an uneventful conclusion to the session, the major indices closed around the upper quarter of their intraday ranges.
As with the previous day’s session, lower volume pointed to a lack of institutional support behind the gains. Total volume in the NYSE receded 8%, while trading in the Nasdaq was 3% lighter. Since the U.S. stock market is closed for the Martin Luther King holiday on Monday, traders and investors are apparently waiting on the sidelines ahead of the long weekend. However, because today is monthly options expiration day, volume may pick up slightly in today’s session.
One commodity ETF that may be setting up for a decent swing trade entry is iPath Platinum ETN (PGM). The setup is illustrated on the daily chart below:
Last month, PGM “undercut” support of its 50-day MA, shaking out the bulls, but quickly snapped back above it just a few days later. PGM drifted back down throughout the first half of this month, but is now consolidating in a tight range, right above support of both its 20 and 50-day moving averages. If PGM rallies above its high of the past several days, it will also correlate to a breakout above its downtrend line from the highs of early December. Such a move should spark bullish momentum that enables PGM to resume its dominant uptrend of the past year. With this setup, a protective stop can be neatly place below the lows of its recent consolidation, which is below support of its 20 and 50-day moving averages as well. As always, a bit of “wiggle room” is necessary below the obvious support level, in order to prevent being shaken out by too tight of a stop.
The S&P Retail SPDR (XRT) is consolidating in a tight range, just below resistance of its 52-week high from last October. A rally above its January 7 high will cause XRT to move to a fresh high, thereby triggering a breakout buy entry. An initial protective stop could be placed just below the rising 50-day moving average, which isn’t far below the low of the short-term consolidation:
In addition to the XRT and PGM setups detailed above, there are several other ETFs that remain on our watchlist for potential buy entry. The iShares BRIC Index (BKF) still looks good for breakout entry, above the $47.50 to $48 area. The iShares Real Estate Index Trust (IYR) is also still a potential breakout play above the $46.50 area. The U.S. Oil Fund (USO) is still a valid pullback play for entry just above yesterday’s high, but crude oil has been choppy, and therefore a bit challenging to hold for more than a few days.
In yesterday’s commentary, we pointed out the bullish setup in PowerShares Clean Energy Fund (PBW). Rallying above Wednesday’s high in the morning, PBW triggered our long entry into the trade. However, intraday news that Germany would be substantially cutting back solar energy subsidies for First Solar, Inc. (FSLR) and related companies caused the entire alternative energy sector to abruptly turn tail shortly thereafter. As such, we made a judgment call to sell PBW when it fell to the prior day’s low and failed to hold support of its 20-day exponential moving average. Though our initial stop was substantially wider than where we sold yesterday, we have learned it is usually better to quickly exit positions for a small loss when they reverse immediately after trade entry.
Although we currently have only one open position (UUP long — entered on the pullback to support), there are a handful of other ETFs we’re stalking for possible buy entry. But the reality is that overall momentum in the market has been lacking recently, despite gradual gains in the broad market. We’d like to see some the confirmation of higher volume coming into the markets, as low-volume markets lacking the punch of institutional activity tend to be choppy. When volume and momentum starts returning to the market, we’ll be prepared to take advantage of new opportunities. Yet, until that happens, patience is in order. Being “bored” is frequently a necessary part of the trading business; be careful to avoid overtrading right now.
HOLIDAY SCHEDULE: On Monday, January 18, the U.S. equities markets will be closed in observance of the Martin Luther King holiday. As such, The Wagner Daily will not be published that day. Regular publication will resume on Tuesday, January 19. Enjoy the holiday weekend.
Open ETF positions:
Long – UUP
Short (including inversely correlated “short ETFs”) – (none)
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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