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Are The Bears Back In Action? (SLV, EWJ, SPY, IWM, DIA, QQQ)

November 2nd, 2011

Stocks were hit hard on Tuesday on a significant uptick in trade. At the opening bell the market gapped down sharply. It found some footing in the early afternoon but eventually sank into the close to end the day near session lows. All five major indices closed more than two percent lower. For the second time in as many days the plunge was led by higher beta issues. By the closing bell the small-cap Russell 2000 (NYSE:IWM), S&P MidCap 400 and the Nasdaq (NASDAQ:QQQ) had lost 3.7%, 3.3% and 2.9% respectively. The S&P 500 (NYSE:SPY) dropped 2.8% while the Dow Jones Indusrtial Average (NYSE:DIA) slid 2.5%. The session was a very difficult one for Wall Street.

Market internals were decidedly bearish as both volume and declining volume skyrocketed. Trade on the Nasdaq spiked by just over 30.0% while on the NYSE volume jumped by 31.9%. Declining volume outpaced advancing volume by a wide margin on both exchanges. By the closing bell the advancing volume to declining volume ratio stood at a negative 15.9 to 1 on the NYSE and negative 9.9 to 1 on the NYSE. The spike in volume points to institutional distribution on both exchanges. Yesterday would also qualify as a follow through day for the NYSE.

Last week we exited a long position in the iShares Silver Trust ETF (NYSE:SLV) prior to reaching the projected target. It turns out that we were able to close this position within ten cents of its most recent swing high. Our reasoning for exiting the trade early included the fact that the broad market was showing signs of being over bought, SLV had filled the gap created on September 23rd, we were approaching major resistance at the 50-day and 200-day moving averages and SLV was beginning to show signs of losing momentum following a significant three day move. Further, we didn’t like the risk/reward associated with trying to squeeze an additional 50-80 cents out of the trade with the potential of sliding back to the 20-day EMA. Finally, the market has lacked follow through recently and to stay in the trade would have been expecting a lot from the market. Combined, these reasons added up to one logical conclusion…take profits.


The iShares Japan MSCI Index ETF (NYSE:EWJ) is quickly approaching a major support level first established almost a year ago. A move below the 12 month low of $9.15 could provide a short entry trigger for EWJ. We are watching this setup carefully for a potential entry should the broad market conditions deteriorate because EWJ is showing significant relative weakness.

Despite the fact that today was a distribution day our bullish stance on the market remains intact. However, the NYSE has now recorded a third distribution day and the Nasdaq a second distribution day since providing buy signals last week. This has made for a very difficult trading environment and appears suited mainly for day trading and one day swing trades. Consequently, it is very easy to overtrade and get chopped up in this environment because the volatility requires almost perfect market timing. Sometimes is just better to be mainly on the sidelines.


The commentary above is an abbreviated version of our daily ETF trading newsletter, The Wagner Daily. Subscribers to the full version receive specific ETF trade setups with detailed trigger, stop, and target prices, as well as daily updates on all open positions. Intraday Trade Alerts are also sent via e-mail and/or text message, on as-needed basis. For your free 1-month trial to the full version of The Wagner Daily, or to learn about our other services, please visit morpheustrading.com.

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.


NYSE:EWJ, NYSE:SLV


 

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