Logging solid gains across the board last Friday, stocks entered the holiday weekend on a positive note, but were still lower for the week. After gapping higher on the open, the major indices climbed throughout the first half of the day, then drifted in a sideways range in the afternoon. Driven by strength in the tech arena, the Nasdaq Composite advanced 1.8%. The S&P 500 gained 1.3% and the Dow Jones Industrial Average rallied 1.0%. The small-cap Russell 2000 and S&P Midcap 400 indices were higher by 1.4% and 1.3% respectively. Like the previous day, all the major indices closed at their intraday highs. For the week, the S&P 500 fell 1.2%, the Dow Jones Industrial Average 1.1%, and the Nasdaq Composite 0.5%.

As is typically the case ahead of holiday weekends, turnover eased across the board. Total volume in the NYSE declined 12%, while volume in the Nasdaq was 6% lighter than the previous day’s level. In both exchanges, volume was well below 50-day average levels. The slower trade failed to confirm the validity of last Friday’s gains, though we’ll know more about the true intentions of mutual funds, hedge funds, and other market-moving institutional players as traders begin returning to their desks this week. We’ll be paying close attention to the volume patterns of the S&P 500 and Nasdaq in the coming days, as it could help us determine whether stocks are likely to continue bouncing higher off last week’s lows, or if we’ll see a resumption of the weakness in the first half of last week.

Most international ETFs pulled back alongside of the domestic markets last week, but iShares Korea (EWY) and iShares Taiwan (EWT) bucked the trend by registering solid gains last week. More importantly, both ETFs are attempting to break out above lengthy bases of consolidation at their recent highs. This is shown on the daily charts of EWY and EWT below:



Because of last week’s corrective action in the U.S. markets, we’re not advocating one should blindly jump into buying the breakouts in either of the ETFs above. During corrective periods in the stock market, breakouts have a much higher rater of failure. However, just in case the market acts well, brushes off last week’s correction, and quickly moves back to its recent highs, we want to be prepared with an updated list of ETFs showing relative strength. Clearly, EWY and EWT should be on that watchlist.

With last week’s massive breakouts in gold and silver, look for continued bullish momentum in the associated ETFs. The spot gold commodity is once again testing pivotal resistance of the $1,000 per ounce mark. Gold has attempted to bust through the 1,000 level on three separate occasions over the past fourteen months, but failed to do so each time. Will this fourth time be a charm? Certainly, traders eyes will be focused on whether or not gold can accomplish the feat this time around. If it does, it will be interesting to see the implications, if any, of the direction of the overall stock market. The breakout level is shown on the weekly chart of the mini spot gold continuous futures contract (@YG) below:


Since we’re long Gold Double Long (DGP), we’re already positioned for a potential breakout above the 1,000 level. But even if that anticipated breakout occurs, we’ll still raise our stop to just below its breakout level, just so that we can still lock in a gain if the spot gold breakout happens to fail. Market Vectors Gold Miners (GDX) and iShares Silver Trust (SLV), both of which we analyzed last week, also surged to finish the week at key, long-term breakout levels. With the huge volume spikes all the precious metals ETFs experienced last week, there is apparently serious accumulation that could actually enable a sustainable breakout in gold to “stick” this week. As such, consider buying any of the precious metals ETFs on slight pullbacks to very short-term support levels (such as the 20-period exponential moving averages on the hourly charts).

In our September 4 commentary, we pointed out the buy setup in iPath S&P 500 VIX Short-Term (VXX). Specifically, it had pulled back to support of its prior downtrend line and 20-day EMA, after breaking out above those levels a few days prior. VXX subsequently continued pulling back in last Friday’s session, steeper than we anticipated, but the play is not quite dead yet; it could still snap back, as long as it closes above that day’s low in today’s session. We also continue to monitor the developing base in PowerShares U.S. Dollar Bull (UUP), which we plan to buy on a short to intermediate-term trend reversal, confirmed by a rally above its 50-day MA and September 1 high.

Open ETF positions:

Long – DGP, IBB, VXX
Short – FXI, SRS, TWM (SRS and TWM are inversely correlated ETFs we’re long)

NOTE: Regular subscribers to The Wagner Daily receive daily updates on the open positions above, as well as new ETF trade setups, including trigger, stop, and target prices. Intraday Trade Alerts are also sent via e-mail and/or mobile phone text message on as-needed basis.

Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (morpheustrading.com), which he launched in 2001. Wagner’s new book, Trading ETFs: Gaining An Edge With Technical Analysis, was published by Bloomberg Press in August, 2008. Wagner also appears on his best-selling video, Sector Trading Strategies (Marketplace Books, June 2002), and is 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. He is also a frequent guest speaker at various trading and financial conferences around the world.

For a free trial to the full version of The Wagner Daily above, which includes detailed ETF trade setups and daily position updates, or to learn about our other newsletters, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com.