A choppy, indecisive session of trading left the major indices flat to modestly lower in yesterday’s session, as volume picked up across the board. After opening slightly lower, stocks quickly stabilized and attempted to reverse at mid-day, but the market was unable to gain any upside traction. The Nasdaq Composite managed to close at the unchanged mark, but the S&P 500 lost 0.3%. The Dow Jones Industrial Average slipped 0.2%. The small-cap Russell 2000 and S&P Midcap 400 indices were lower by 0.3% and 0.4% respectively. The main stock market indexes finished around the upper third of their intraday ranges.

Total volume in the NYSE increased 21%, while volume in the Nasdaq was 13% greater than the previous day’s level. The S&P 500’s loss on higher volume caused the index to register a bearish “distribution day,” indicative of institutional selling. However, considering the extremely light turnover of the Columbus Day session, it didn’t take much for the pace of trading to pick up. In both exchanges, advancing volume was roughly on part with declining volume. Given the lighter than average volume levels of the market’s recent gains, stocks actually withstood the selling pretty well.

After the close of yesterday’s trading, Intel announced a surprisingly positive earnings report that sent shares of its stock roughly 5% higher in after-hours trading. The news also spiked the S&P and Nasdaq futures to the upside, and that bullish momentum is likely to carry into the opening of today’s session as well. A week ago, the Semiconductor HOLDR (SMH) was showing relative weakness to the broad market, but the ETF surged higher on October 9, after briefly “undercutting” support of its 50-day moving average. In a recent alert to subscribers, we pointed out intraday weakness in the Semiconductor HOLDR (SMH), and said daytraders only might consider a short sale. However, because we know the “undercut” in an ETF trading near its highs often precedes a surge to new highs, we cautioned that any short position in SMH should not be held overnight. Several days later, SMH had indeed recovered back to the upper end of its recent trading range. Now, given the pre-market strength in Intel, SMH is poised to gap up and breakout above the high of a lengthy base of consolidation. This is shown on the daily chart below:


One way to take advantage of gap ups to new highs is to force the ETF to confirm its morning strength by waiting for it to subsequently rise above the high of its first 20 minutes of trading (the actual basis behind the MTG Opening Gap Rules). If it does, odds are the bullish momentum will persist throughout most of the day. If, however, traders sell into strength of the upside gap, the ETF will open higher, but fail to move above its initial high. In that case, it may be best to wait on the sidelines. When entering a swing trade in an ETF that breaks out and rallies to a new high after the first 20 minutes of trading, stops can often be placed just below support of the intraday low (plus some “wiggle room”). But in case the range from the intraday low to the 20-minute high is too wide, a tighter stop below the 20-EMA on the 15-minute chart often does the trick. Strong stocks and ETFs that break out on convincing volume should not violate support of that moving average on the initial move higher.

For the past four months, crude oil futures have been stuck in a choppy, sloppy sideways range. However, the sticky stuff is once again testing upper channel resistance of that range. If it finally breaks out this time, it could lead to a very high-momentum ascent in the short-term. Typically, the longer a base of consolidation that precedes the breakout, the more powerful the eventual breakout. The daily chart of USO is shown below:


At one time, the complicated manner in which the portfolio of USO was comprised had the negative effect of causing the ETF to lag the actual performance of the actual crude oil futures contracts. This appears to have changed in recent months, as the ETF and futures contracts have been trading pretty closely in sync with one another. Over the past month, for example, the E-mini Crude Oil Continuous Contract (@QM) has gained 6.46% (through 4:00 pm ET yesterday). Comparatively, USO has gained 6.44%. The day-to-day price patterns have also been mirroring one another, so it’s good to see USO is no longer lagging the actual commodity price movements. Going into today, we’re stalking USO for potential buy entry on a powerful breakout above its range. Regular subscribers should note our detailed trigger, stop, and target prices below.

Since the beginning of the month, fixed-income (bond) ETFs have fallen out of favor. There has been a definitive rotation out of bonds, which is pressuring many of the fixed-income ETFs. One trade setup that may soon enable one to take advantage of this rotation is a possible buy entry into UltraShort 20+ year T-bond (TBT), an ETF that is inversely correlated to the price of the long-term gov’t bonds. Take a look:


On October 9, TBT gapped up to break out above its 20-day exponential moving average. Yesterday, it pulled back to new short-term support of that same level. It’s probably too early to enter TBT right now, as it has not yet confirmed its trend reversal. But notice how its primary downtrend line converges with the 50-day moving average (the teal line). If TBT rallies to close above that level, it will have technically broken its downtrend. The first pullback after such a breakout would be an ideal buy entry. As such, you may want to put TBT on your watchlist for potential buy in the coming week. As per yesterday’s commentary, we’re also stalking the following list of ETFs for pullback buy entries: RSX, EWZ, FXC, XLP, ILF, and GLD (if you’re not already long).

Open ETF positions:

Short – MOO

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.