Short Setup In Small-Cap Russell 2000 ETF
Stocks sold off sharply on Friday as volume declined. Friday’s action left equities mixed for the week. All five major indices closed down on the session as the higher beta exchanges led the decline. The small-cap Russell 2000, Nasdaq and S&P MidCap 400 plummeted by 1.7%, 1.2% and 1.1% respectively. Both the Dow Jones Industrial Average (NYSE:DIA) and the S&P 500 (NYSE:SPY) fared slightly better as both dropped 0.8% for the session. The major indices are once again at a major inflection point.
Light trade on Friday left market internals mixed. Despite broad price negativity, turnover was light across the board. Volume on the Nasdaq fell by 13.4% and on the Big Board by 6.4%. However, declining volume significantly outpaced advancing volume on both exchanges. The ratio of declining to advancing volume ended the session at 4.4 to 1 on the NYSE and 6.2 to 1 on the Nasdaq. This was one of the worst readings for this indicator in several months. Nonetheless, we would not classify Friday as a distribution day for the broad market due to the lack of volume behind the move.
On Friday we sent an intra-day alert that we were entering a short position in the iShares MSCI Japan Index ETF (NYSE:EWJ). Shortly after our entry, EWJ fell abruptly and eventually closed near the low of the session. For our subscribing members, trade details are available in the open positions section of the newsletter.
As the charts below indicate, the major indices are all trading at key support levels. If we lose these levels it is logical to expect at least a day or two of follow through to the downside. However, we are sticking by our plan to take profits quickly as the broad market still remains in a long term uptrend and follow through has been minimal on either side of the market recently.
Due to the relative weakness being exhibited by the iShares Russell 2000 Index ETF (NYSE:IWM) we are placing it on the watchlist as a possible short candidate. Should the market turn lower over the next several days, IWM will likely drop the hardest due to its recent lack of strength compared to the broad market. Further, this ETF is trading below its trendline and a move below the two day low of $82.98 would result in a loss of support of the 50-day MA.
It is noteworthy to mention that the NYSE is showing relative weakness when compared to the five exchanges that we track. Further, for the most part, market leaders either got pounded or closed near session lows on Friday. Of import, both BIDU and AAPL lost key support levels on the session as trade increased in both stocks. Fading leadership generally does not bode well for the broad market.
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: email@example.com.
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