A worse-than-expected unemployment report last Friday morning caused stocks to begin the day substantially lower, but the resilient bulls immediately stepped in, enabling the major indices to reverse into positive territory within the first thirty minutes of trading. However, bullish momentum was kept in check throughout the remainder of the day, as stocks subsequently meandered in a lazy, sideways range all the way to the closing bell. Both the S&P 500 and Nasdaq Composite advanced 0.3%, as the Dow Jones Industrial Average gained 0.2%. Small and mid-caps showed slight bearish divergence. The Russell 2000 and S&P Midcap 400 indices eased 0.1% and 0.2% respectively. With the exception of the Russell 2000 and S&P Midcap 400, both of which finished just above the middle of their intraday ranges, the main stock market indexes closed near the upper 20% of their intraday ranges.

Although stocks quickly shook off the opening weakness, market participants appeared to take a nap thereafter. Total volume in the NYSE was 17% lighter than the previous day’s level, while volume in the Nasdaq eased 9%. Turnover in both exchanges was well below 50-day average levels, and volume in the Nasdaq was the slowest in nearly a month. Notably, the major indices have closed higher in each of the past five sessions, but all five of those days were accompanied by declining volume. As such, last week’s gains were apparently the result of a temporary lack of selling pressure, rather than an abundance of buying interest. This is concerning because such a string of lower volume gains can easily be erased with just one day of swift institutional selling. Until we see at least a single round of higher volume gains, denoting the possible return of institutional buying, we view the long side of the market with a substantial amount of trepidation.

While scanning hundreds of ETF charts over the weekend, we observed the number of technical setups for the short side greatly outnumbered the quantity of bullish setups. Last week’s gains merely caused many ETFs to bounce into resistance of their prior uptrend lines that were broken two weeks ago. Quite a few ETFs also rallied to close right at new resistance of their 50-day moving averages. The iShares DJ Transportation Avg. Index (IYT) is a good example of this:


From October 21 through November 2, IYT got smoked, tumbling nearly 12% during that nine-day period. Furthermore, the decline that started on October 21 began at resistance of its prior high from mid-September, where a short-term “double top” was formed. Now, IYT enters this week at major resistance of its 50-day moving average (the teal line), which also approximately coincides with resistance of its 61.8% Fibonacci retracement. Certainly, IYT could move higher in the next few days, running stops of short sellers, but the intermediate-term uptrend has already been broken because IYT has formed a significant “lower high” and “lower low” on its daily chart. This tells us the reward-risk ratio of buying IYT, even if it reclaims support of its 50-day MA, is not very positive.

We’ve been discussing the relative weakness in small-caps lately, so the performance of the Russell 2000 this week is likely to remain a leading indicator for the direction of the broad market. On the daily chart of the Russell 2000 below, notice the index is now bumping into resistance of its prior low from September, and still must contend with resistance of both its 20 and 50-day moving averages:


One of the only sectors with charts that still look relatively healthy is energy. Unlike nearly every other industry, the various energy ETFs neatly held support of their 50-day MAs on the recent pullback, and also formed significantly higher “swing lows” above their early October lows. If ETFs such as Oil Service HOLDR (OIH) or S&P Energy SPDR (XLE) move above the highs of last week’s consolidation, they may be good for a short-term pop, at least to a test of their recent highs.

The lack of any volume on the upside is preventing the market from getting the confirmation we would like to see in order to start buying on the long side of the market again. Nevertheless, despite what would “normally” be ideal technical setups for short selling (bounce into resistance of 50-day MA or prior uptrend line after breaking down, head and shoulders patterns, relative weakness, et cetera), bullish momentum remains amazingly persistent. Therefore, we’re inclined to just continue focusing on managing existing positions right now, rather than entering new ones. It’s starting to look as though the major indices may be entering into a range-bound period of trading for the next several months, in which the bulls and bears share a balance of power. If that occurs, we would trade both sides of the market, long the ETFs with relative strength, and short those with relative weakness, but we first need to see that a sharp move in either direction is not just around the corner.

Open ETF positions:

Long – UUP
Short – FAZ, EDZ, TBT (all three are inversely correlated “short ETFs”)

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.