The month of August concluded in uneventful fashion, as the major indices spent the day chopping around indecisively before calling it a draw between the bulls and bears. After opening substantially lower, stocks promptly reversed into positive territory, but afternoon selling pressure held the market’s intraday rally attempt in check. The S&P 500, Dow Jones Industrial Average, small-cap Russell 2000, and S&P Midcap 400 were all unchanged. The Nasdaq Composite slipped 0.3%. The main stock market indexes settled near the middle of their intraday ranges, further confirming the lack of direction in yesterday’s session.
Volume surged across the board, as mutual funds, hedge funds, and other institutions made month-end adjustments to their portfolios. Total volume in the NYSE jumped 71%, while volume in the Nasdaq rose 32% above the previous day’s level. Turnover in both exchanges moved back above 50-day average levels. When at the upper channel of an extended uptrend, minimally changed prices on higher volume is known as “churning,” a bearish scenario caused by institutional selling into strength near the highs. Conversely, a higher volume session with flat price action near the lows of a downtrend is often bullish, as it shows prices are refusing to go lower, despite the abundance of supply.
The basic rule of relative strength trading is stocks and ETFs that do not move lower when the broad market does are typically the first equities to surge higher when the major indices eventually bounce. Since the U.S. markets trended lower throughout the entirety of last month, ETFs still holding at or near their highs are potential buy candidates that will likely zoom higher when the broad market starts finding support and moving higher again (remember, the major indices are still in an extended, sideways range). Therefore, before the market starts ripping higher again, now is a good time to start building a fresh watchlist of ETFs with relative strength, in order to be prepared for fresh buying opportunities if they arise.
Of the various types of ETFs on the market, select international ETFs were among the top performers in August. Several ETFs in this group showed significant relative strength by either consolidating in a sideways range, near their highs, or even trending higher, while the domestic markets sold off. One such ETF that may trigger for buy entry in the coming days is iShares Turkey Index (TUR). The setup is shown on the daily chart below:
As the S&P, Nasdaq, and Dow trade below their 20, 50, and 200-day moving averages, near their July lows, TUR consolidates near its recent highs, above all three of those moving averages. Last week, notice TUR successfully tested support of its 50-day moving average (the teal line), and is now holding above its 20-day exponential moving average (the beige line) as well. The blue dotted line annotated on the chart above marks resistance of the short-term downtrend line from the August high. A rally above that level, above the 3-day high, is our buy entry point into TUR. With a little help from a bounce in the U.S. markets, TUR should break out to a fresh, all-time high shortly thereafter. On “Today’s Watchlist” below, regular subscribers should note our detailed trigger, stop, and target prices for the TUR setup.
Another international ETF to consider for potential buy entry is Market Vectors Indonesia (IDX). For the past two months, IDX has been consolidating in a sideways range, near its all-time high. The weekly chart of IDX below illustrates this:
Zooming into the daily timeframe, we see IDX pulled back to support of its 50-day moving average on August 30, then held above that level yesterday. Take a look:
As shown with IDX above, we always analyze both the daily and weekly timeframes of ETFs. The weekly chart shows the “big picture” of the trend, and removes the “noise” from the shorter-term daily chart. However, the daily chart is necessary in order to fine tune an entry point for an ETF that looks good on the weekly chart. In this case, we like IDX for potential buy entry on a rally above yesterday’s high, as that would put the ETF back above its 20-day EMA, after bouncing off its 50-day MA a few days prior. A breakout to a new all-time high could follow thereafter, assuming the U.S. markets at least cooperate.
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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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