So Many Hammers – The Wagner Daily
The Wagner Daily – June 17, 2011
Concise technical analysis and picks of the leading global ETFs
Commentary:
Stocks ended the session mixed on Thursday. The market opened the day higher, sold off sharply in the early afternoon but recovered into the close. The major indices also ended the session mixed. The Nasdaq fell 0.3% while the S&P MidCap 400 slid fractionally. The small-cap Russell 2000 showed the most spunk as it added 0.7% yesterday. The Dow Jones Industrial Average and the S&P 500 tacked on gains of 0.5% and 0.2% respectively.
Market internals were mixed yesterday. Volume was down fractionally on the Nasdaq and fell 2.5% on the NYSE. Advancing volume edged out declining volume on the NYSE by a ratio of 1.1 to 1. On the Nasdaq the advancing volume to declining volume ratio ended the day at 1.8 to 1. Thursday’s lighter volume suggests that institutions were not active participants in the day’s action.
The market continues to show signs of being oversold. A quick review of the Nasdaq Composite ($COMPX) suggests that caution is warranted on the short side of the market. Over the past four trading sessions the Nasdaq has begun whipsawing about its 200-day MA and appears likely to find support at this key level. It is important to note that at the current trading level there is a convergence of the 200-day MA, the long term uptrend line which began in March 2009 and the prior swing low which occurred on March 16th of this year. Notice how the Nasdaq found support and quickly reversed off the 2,600 mark yesterday. Further, this index formed a distinct reversal candle yesterday as it recovered quickly from the intraday lows. All of these factors combined provide a warning to avoid further shorting activity for the moment.
The Direxion Daily Energy Bear 3X Shares ETF (ERY) has attempted to break above its prior swing high of $17.15 on three occasions in the past four days. Each time ERY has been met with resistance and has returned to the trading range. The next test of this key resistance level should result in a move higher for ERY. We see two possible long setups for this ETF. The first possible long trigger would occur if ERY were to move back above yesterday’s high of $17.42. Alternatively, a buy entry for ERY could trigger on a pullback towards its 20-day EMA. We like the current price action in ERY and will be monitoring it closely for a possible entry.
Reversal candles (hammers) have been abundant in our nightly research over the past two days. Hammers are a type of reversal candle that form near the end of a selloff. A hammer is formed as follows: After a period of significant selling an ETF opens and moves significantly lower from its opening price. However, following the sharp selling, the ETF rallies to close well above the intraday low. The resulting candlestick looks like a lollipop with a long stick. This candlestick formation is widely considered bullish as it suggests that bears are losing control of the current trend. Today’s chart of the $COMPX provides an excellent example of a hammer.
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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