Struggling to find direction, stocks bobbed and weaved in a tight, sideways range throughout yesterday’s session. A modest boost in the final hour of trading lifted the S&P 500 and Nasdaq Composite to matching gains of 0.3%, but the Dow Jones Industrial Average edged 0.1% lower. Both the small-cap Russell 2000 and S&P Midcap 400 indices were unchanged. Although the trading ranges were narrow, the major indices closed near their intraday highs.

Turnover eased across the board, as total volume in both the NYSE and Nasdaq was 12% lighter than the previous day’s levels. In both exchanges, volume was below 50-day average levels, indicating only a minimal presence of institutional participation. It’s positive that the S&P and Nasdaq have not registered any “distribution days” (losses on higher volume) since October 1, but volume on the upside bounce has been restrained as well. Mutual funds, hedge funds, and other institutions are likely waiting on the sidelines to see the market’s latest batch of key corporate earnings reports. Reassuring numbers could provide the needed confidence for funds to start accumulating shares again.

Over the next few days, PowerShares Base Metals (DBB) could break out above a level of horizontal price resistance that enables it to make a nice move. We bought DBB on September 15, when it “undercut” its 20-day exponential moving average, while holding within the confines of a bullish, seven-week price consolidation. However, because it has continued to move in a sideways range since then, DBB apparently wasn’t ready to break out above its lengthy base yet. But over the past week, DBB has “undercut” (and held) more significant support of its 50-day moving average. Such a shakeout below the 50-day MA could give DBB the momentum to finally break out above its consolidation and make another leg higher. The daily chart of DBB is shown below:


If DBB clears resistance of the September 30 high ($18.41), it could quickly attract the necessary buying interest to propel it to a fresh 52-week high. Presently, DBB is trading at our original entry point, but a rally above the $18.41 area could provide a secondary buy entry point if you missed the original one. The nice thing about a setup like this, where the ETF has recently “undercut” its 50-day MA, is that stop placement becomes very clear. In this case, our DBB stop is simply below the October 5 “swing low” support.

Over the past few weeks, iShares Emerging Market Index (EEM) has been showing relative strength to the broad market, and its daily chart pattern is such that the international ETF could be positioned to make another leg up, at least in the short-term. First, take a look at the relative price performance of EEM over the pasts ten days, compared to the S&P 500:


The relative strength of EEM (the blue line) has become more apparent over the past several days, as its gain has outperformed the S&P 500’s gain. However, upon closer observation, you’ll notice EEM actually began showing relative strength last week. The dashed, horizontal line labeled “A” shows that EEM formed a near-term double bottom, but the S&P 500 formed a lower low at the same time. EEM followed up the double bottom by rallying to a higher high two days ago (“B”), while the S&P 500 remains below its late September high. Upon noting the relative strength of EEM, we next take a look at its daily chart, to make sure a buyable pattern confirms the relative strength:


The recent “undercut” of its 20-day exponential moving average, followed by a swift reversal to the highs of its recent range, position EEM for a breakout to another new 52-week high. We like it for buy entry above the horizontal line on the chart above (over the $39.50 area). However, because it’s a breakout entry, rather than a pullback entry, a tight stop should be used. Consider a stop just below yesterday’s low, which is below support of the 20-EMA on the hourly chart as well. If EEM breaks out, the 20-EMA/60 min. serves as a logical level to trail a stop if viewing EEM as a near-term trade.

Yesterday, all the main stock market indexes traded within the confines of their respective intraday ranges of the previous day. This is known as an “inside day.” It doesn’t tell us much, other than it was basically a standoff between the bulls and bears. The main stock market indexes still have considerable overhead supply to contend with (from the September highs), but a few days of institutional accumulation could once again push the major indices to new highs of the year. Quarterly earnings season officially kicked off last night, with the latest numbers from Alcoa (AA). The earnings reports of market-moving companies in the coming weeks is likely to be the biggest determinant of the market’s next move.

Open ETF positions:

Short – MOO, DUG (an inversely correlate ETF 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 (, 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.

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