Recovering most of the previous day’s losses, stocks rebounded solidly yesterday. After drifting lower through the first hour of trading, buyers returned to the markets, enabling the main stock market indexes to trend higher throughout the rest of the day. The Nasdaq Composite climbed 1.1%, the S&P 500 0.8%, and the Dow Jones Industrial Average 0.5%. The small-cap Russell 2000 and S&P Midcap 400 indices scored identical gains of 1.3%. A slight pullback in the final minutes of trading prevented the major indices from finishing at their best levels of the day, but they still settled near their intraday highs.
Unfortunately for the bulls, yesterday’s rally lacked the punch of institutional buying. Total volume in the NYSE was 12% lighter then the prior day’s level, while volume in the Nasdaq declined 3%. Since Tuesday was a session of higher volume losses (“distribution day”), it would have been much better if turnover picked up even further during yesterday’s subsequent recovery attempt. Instead, institutional funds apparently were skeptical about participating in the rally. However, market internals were firmly positive. In both the NYSE and Nasdaq, advancing volume exceeded declining volume by a margin of approximately 3 to 1.
Yesterday, we looked at the chart of Claymore Global Solar Energy (TAN), as one of a handful of ETFs we’re monitoring for potential buy entry on a pullback. After selling off in the morning, then reversing to close near its intraday high, the short-term pullback in TAN may soon be finished. But we discovered a related ETF with a weekly chart pattern that may be better. Unlike TAN, which is a “pure play” whose portfolio is comprised exclusively of solar energy stocks, the index of PowerShares Clean Energy (PBW) “is designed to deliver capital appreciation through the selection of companies that focus on greener and generally renewable sources of energy and technologies that facilitate cleaner energy” (from the PowerShares web site). Yesterday, PBW tested and neatly bounced off support of its 20-day exponential moving average (EMA). This is shown on the daily chart of PBW below:
Looking at the longer-term weekly chart, one sees that PBW has recently broken out above the high of a six-month range. Now, the current pullback to that breakout level provides us with an ideal buy entry point, in anticipation of another leg up within the uptrend. We plan to buy PBW on a rally above yesterday’s high. Here is the weekly chart:
Recently, we pointed out the pullback in iShares Real Estate Index Trust (IYR), which had pulled back to support of its 20-day EMA after breaking out in December. Over the past week, IYR has been trading in a tight range, right at support of its 20-day EMA. With the 50-day MA rising up to provide further support, IYR may soon trigger for a potential swing trade, above the high of its recent range. This is shown on the daily chart below:
On the international front, we like the pattern in iShares BRIC Index (BKF), an ETF whose portfolio is comprised of stocks from Brazil, Russia, India, and China. Take a look:
On January 6, BKF attempt to break out above horizontal price resistance, but failed to hold up. In the days that followed, BKF drifted lower, but is holding support of its 20-day EMA. The next breakout above resistance has a better chance of “sticking” because there is now less overhead supply to contend with, and the disappointed bulls who bought and sold will jump back in, thereby sending the price higher. We like BKF for buy entry around the $48 area.
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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