A sell-off in several Asian markets prompted stocks to open substantially lower yesterday morning, but the broad market quickly stabilized. Keeping early losses in check, the major indices merely drifted in a tight, sideways pattern throughout the entire day. The Dow Jones Industrial Average finished the day 0.5% lower, the S&P 500 lost 0.8%, and the Nasdaq Composite gave up 1.0%. Continuing the recent pattern of relative weakness in small and mid-cap stocks, the Russell 2000 and S&P Midcap 400 indices fell 1.4% and 1.3% respectively. The main stock market indexes closed in the upper half of their intraday ranges, though it doesn’t mean much considering they were range-bound throughout the entire session.

Turnover was mixed. Total volume in the NYSE swelled 16%, but trading in the Nasdaq was 6% lighter than the previous day’s level. The S&P 500’s loss on higher volume caused the index to register a “distribution day,” indicative of selling amongst mutual funds, hedge funds, and other institutions. The tech-heavy Nasdaq averted the same bearish label; however, recall the Nasdaq had a session of “churning” the previous day. Despite this week traditionally being among the slowest of the year, volume in both exchanges moved back above 50-day average levels. In the NYSE, declining volume exceeded advancing volume by nearly 5 to 1. The Nasdaq adv/dec volume ratio was negative by less than 2 to 1.

In yesterday’s commentary, we discussed the potential breakout pattern that was developing on the weekly chart of SPDR Gold Trust (GLD). While that pattern and bullish setup is still in effect, we’re now stalking iShares Silver Trust (SLV), another precious metals ETF, for breakout as well. The weekly chart below illustrates pivotal resistance of its long-term downtrend line. If SLV convincingly moves above that downtrend line, considerable upside momentum should hit SLV in the intermediate-term. On the shorter-term daily chart that follows, note the specific area of horizontal price resistance that roughly converges with the weekly downtrend line. A rally above that $14.80 level would trigger our potential buy entry into SLV:



As the U.S. dollar has been consolidating near its lows, against most global currencies, the PowerShares U.S. Dollar Bullish (UUP) may soon break key price support and fall to a new low. If it does, traders looking for a breakout play with low correlation to the direction of the overall stock market might consider buying PowerShares U.S. Dollar Bearish (UDN), which moves in the opposite direction of UUP. The daily chart of UDN is shown below:


Over the past week, the trading range of UDN has been tightening up. This is a good sign, as it increases the odds of the breakout “sticking” when/if it happens. Also, the rising 20-day exponential moving average (the beige line) has been neatly providing price support. The more significant 50-day MA (the teal line) is just below the 20-day EMA. A rally above resistance of the short-term downtrend line annotated on the chart above (over the $27.60 area) would represent a potential buy point, in anticipation of UDN making another leg higher. Furthermore, a breakout in UDN (a breakdown in the value of the U.S. dollar) would likely have bullish implications on the price of commodity ETFs such as gold and silver, thereby benefiting the SLV setup shown above.

Considering China’s Shanghai Composite fell nearly 7% ahead of yesterday’s session, the domestic markets subsequently help up relatively well. The major indices are still hanging around the lower end of last week’s trading ranges, meaning yesterday’s sell-off was not convincing enough to warrant a sudden switch to an aggressive short bias in the broad market. Yesterday, we said, “It’s probably a good time to sit on the sidelines, focusing on managing existing positions, rather than entering new ones. If the broad market makes a clear move out of last week’s trading range, in either direction, it will provide us with more direction that will increase our odds of staying on the right side of the market.” Since that hasn’t happened yet, our overall bias has not yet changed. Still, it would only require one of the major indices closing firmly below yesterday’s low to break below its 20-day EMA, and therefore warrant a change in short-term bias. Presently, we have a diverse mix of five long and short ETF positions in our model ETF portfolio. All but one is now showing an unrealized gain since entry.

Open ETF positions:

Long – DGP, IBB, VXX
Short – FXI, TWM (long this inversely correlated ETF)

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.