The indecision of recent days continued yesterday, but this time volatility surged as well. The session was a tale of two markets, as stocks sold off sharply in the morning, but reversed to close moderately higher in the afternoon. At its morning low, the Nasdaq Composite was down as much as 1.6%, but the tech-heavy index recovered to eke out a gain of 0.2%. The S&P 500 and Dow Jones Industrial Average followed similar price patterns before settling with advances of 0.3% and 0.4% respectively. The small-cap Russell 2000 showed slight relative weakness by closing unchanged. The S&P Midcap 400 climbed 0.4%. All the major indices finished in the upper 20% of their intraday ranges.
Volume rose across the board, as substantial morning weakness and the subsequent afternoon recovery kept traders on their toes. Total volume in the NYSE rose 10%, while volume in the Nasdaq was 6% greater than the previous day’s level. Despite the increased turnover, volume in both exchanges remained below 50-day average levels. In the NYSE, advancing volume exceeded declining volume by a margin of 2 to 1. The Nasdaq adv/dec volume ratio was positive by 3 to 2.
In the August 24 issue of The Wagner Daily, we analyzed the daily chart of the Oil Service HOLDR (OIH), which was poised to break out above a base of consolidation. Later that day, OIH attempted to break out above the high of the range we were monitoring, but we passed on buying it because of the morning gap up that later fizzled out. The following day, OIH sold off to come back down to the breakout level, which was preceded by two subsequent sessions of nearly flat closing prices. All of this leaves us with a pattern that is still potentially buyable in the coming days, though “scaling in” to the trade with partial share size now makes the most sense. Below is an updated snapshot of the OIH daily chart:
Yesterday morning, OIH sold off to break below the lows of the previous two days, but came into support of its 20-day exponential moving average (EMA), which helped OIH to reverse to finish near the previous day’s close. While that morning weakness may seem bearish, it actually had the effect of shaking out the “weak hands” who sell at the first hint of trouble. This, in turn, absorbed overhead supply, which could now enable OIH to more easily move higher. For this setup, we like the idea of buying an initial half position on a rally above the two-day high (approximately 108.60). The remaining shares could then be added on further price confirmation that OIH will hold its breakout this second time around. The remaining shares could be added over the 111.70 area. Scaling into a position in this manner is a great way to take advantage of a potential opportunity, while still minimizing risk in an indecisive environment.
Market Vectors Steel (SLX) is an ETF in the basic materials sector that has been forming a lengthy base of consolidation in recent weeks. Holding above both its 20 and 50-day moving averages, the trading range in SLX has tightened up. We’re monitoring SLX for a potential breakout above the high of its consolidation, which could constitute a buy entry. The setup is shown on the daily chart below:
On August 20, we initiated a short position in iShares China Xinhua 25 (FXI), as it formed a “bear flag” pattern and ran into resistance of its 20-day EMA. Since then it has drifted slightly lower, but formed a bullish “hammer” candlestick pattern yesterday, as it touched support of its 50-day MA. Often, such a formation is a warning sign to cover a short position, as it often leads to higher prices in the days that follow. However, it’s interesting to note the Shanghai Composite fell nearly 3% overnight. This could lead to opening weakness in FXI, which now has the potential of testing yesterday’s intraday low. If FXI goes on to close below that low, the bullish “hammer” will have failed, and FXI will have fallen below its 50-day MA. The daily chart of FXI is shown below:
The reason we point out the current situation in FXI is not to hype our current short position. Rather, we view the performance of FXI as a leading indicator for the performance of the U.S. markets. Since FXI, along with a few other international ETFs, have been outperforming the gains of the domestic market, a sudden reversal of fortune in those international ETFs could be a reliable warning signal that a correction in the U.S. broad market is forthcoming. Conversely, if FXI shakes off opening weakness and closes sharply higher today, it could be a sign of continued resilience in emerging markets, as well as the domestic markets.
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.
