Stocks were unable to follow through on the higher open, as the main averages stalled out around 11 am before quickly rolling over to a new intraday low. Once the averages broke their opening hourly range lows they steadily pushed lower all session long. Stocks did manage to find some traction late in the session, but more selling into the close allowed the averages to finish in the bottom 10% of the day’s range. The S&P Midcap 400 and Dow Jones Industrial Average both closed 0.7% lower. The S&P 500 and small-cap Russell 2000 were right behind with matching losses of 0.8%. The Nasdaq Composite gave back 1.1%.
Turnover eased across the board yesterday. Nasdaq volume fell 11% off the prior day’s pace, while NYSE volume decreased by 10%. Although volume was lighter, the pace did pick up during the afternoon selloff. This was reflected in the market internals, which reversed from a positive 3 to 1 on the open to a negative 3 to 1 by the close on both exchanges.
Our existing long position in the PowerShares DB Agriculture Fund (DBA) looks to be finding support once again at the 20-day exponential moving average. After Wednesday’s shakeout below the 20-day EMA, DBA closed back above the moving average yesterday. A move above the three-day high could produce enough momentum to break the short-term downtrend line (around 26.25) drawn on the daily chart below. Those who missed our initial entry and wish to get long could still do so with a slightly higher entry point above the three-day high at 26.00.
Aside from DBA, we continue to see a ton of relative strength out of the emerging market sector. The iShares MSCI Turkey Index (TUR) has formed a cup and handle pattern since pulling back off the April high, basically ignoring the summer selloff. The weekly chart below details the relative strength in TUR vs the S&P 500 (note how the relative strength line has already broken out to new highs well ahead of the price action).
TUR found support at the 10-week moving average (or 50-day MA on a daily chart) this past week. Longer-term traders may establish small size at or near these moving averages with the idea of adding to the position on strength (which could be a close above the 20-day EMA around 60.50).
Market Vectors Indonesia (IDX) is another emerging market ETF that is trading near its 52-week high. Like TUR, IDX also has great relative strength, as it has made a series of higher highs and higher lows while the broad market sold off. The breakout entry is rather obvious here, so we would prefer a lower-risk entry point on a pullback somewhere between the 20-day EMA and the 50-day MA (around 75.50 – 76.50). A touch of the rising 50-day MA is the ideal entry point if the retracement is that deep.
As mentioned is yesterday’s report, we felt there was a good possibility of the market trying to stage a short-term bounce and catch the bears off guard. If this plays out then we could see a low-risk buy entry develop in the iPath S&P 500 VIX Mid-Term Futures ETF (VXZ). Look for VXZ to test support at the converging 20-day and 50-day moving averages in the 89.50 – 90.00 area within the next few days. If the potential bounce in the market is short-lived, then the next leg down could produce a decent move in VXZ with a target around 100.00.
Open ETF positions:
Long – UUP, DBA
Short (including inversely correlated “short ETFs”) – SSG
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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