Potential short setup in (EWY) – The Wagner Daily
The Wagner Daily – March 1, 2011
Concise technical analysis and picks of the leading global ETFs
Commentary:
Stocks closed higher on Monday on improved volume. All five major indices ended the day higher with the Dow Jones Industrial Average leading the rally. The blue chip index posted a 0.8% gain on the session. The S&P 500, the S&P MidCap 400 and the small-cap Russell 2000 tacked on gains of 0.6%, 0.2% and 0.3% respectively. The Nasdaq was the day’s laggard as the tech rich index closed barely in the black. The weakness in the Nasdaq was largely attributable to poor performance in the chip and networking sectors.
Market internals ended the day mixed. Volume rose on the Nasdaq and the NYSE by 8% and 16.7% day over day. However, given Monday’s weak volume, an increase could have been anticipated. Advancing volume outpaced declining volume on the NYSE by a ratio of 1.8 to 1. On the Nasdaq however, declining volume was slightly higher than advancing volume. The day ended with a ratio of 1.1 to 1 in favor of down volume.
The iShares MSCI Japan Index ETF (EWJ) provides an excellent example of why it is often difficult to trade in the wake of volatility. The chart of EWJ is quite similar to many charts that we have analyzed in our nightly research. Prior to last week’s sharp selloff, EWJ had broken out of a two week consolidation pattern to set a new 52 week high. Further, during this time period, volume in EWJ fell dramatically just before the breakout move. However, once this ETF reached its new high on February 18th, it fell off cliff the next day. EWJ then formed back to back reversal candlesticks (long legged doji stars). It then gapped up dramatically on February 25th and then again on February 28th. Getting short EWJ on February 18th in the hopes of a market selloff or getting long on February 24th in the hopes of a gap up, is in our view tantamount to throwing darts. In our opinion, when financial instruments begin acting this way en masse, it is better to go to cash than to chase the volatility (whipsaw moves/gaps).
In yesterday’s newsletter we mentioned that the iShares MSCI South Korea Index ETF (EWY) had recently broken its uptrend line that began in July of 2010. Further we stated that a rally back into resistance near the 20-day EMA could present a shorting opportunity in EWY. Yesterday, on a fairly strong day in the market, EWY gapped down and traded in a tight range for the session. Given yesterday’s price action in this ETF, two potential shorting opportunities exist. The first scenario was discussed in Monday’s newsletter, and the second scenario would be to short EWY below the February 24th low of $57.17. We continue to monitor EWJ as a potential short setup.
Given the inconsistency in the market over the past week we have chosen a conservative stance with respect to entering new trades. We would rather be flat than to get chopped up in the current market conditions. We are patiently waiting for quality setups that meet our technical standards.
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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