Wagner Daily: Potential Short Setup In Russell Microcap Index (SPY, DIA, QQQ, IWM, IWC)

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May 6, 2011 9:03am NYSE:IWC NYSE:IWM

Stocks continued to struggle on Thursday as they lost significant ground for the fourth consecutive day. All five major indices ended the day in negative territory with the Dow Jones Industrial


 Average (NYSE:DIA) and the S&P 500 (NYSE:SPY) leading the plunge. Both Indices dropped 1.1% for the session. The Nasdaq (NASDAQ:QQQ) slid 0.5% while both the S&P MidCap 400 and the small-cap Russell 2000 (NYSE:IWM) closed 0.4% lower.

Internals were bearish across the board on Thursday. Volume finished higher by 0.6% on the Nasdaq and 4.8% on the NYSE. Declining volume outpaced advancing volume fractionally on the Nasdaq and by a factor of 2.6 to 1 on the Big Board. Yesterday’s internals indicate that major institutional players participated actively in the decline. However, for the second day in a row, the Nasdaq maintained relative strength to the broad market.

Given the four day slide in the market, it is a good time to step back and evaluate the health of the major indices. A quick comparison of all five indices clearly shows that small-cap stocks have taken the brunt of the recent selloff. The iShares Russell 2000 Index ETF (NYSE:IWM) is the only of the five major indices to be testing its 50-day MA. The Dow Jones Industrial Average and the Nasdaq are demonstrating the most strength as both have managed to hold their 20-day exponential moving averages. Both the S&P 500 and the S&P MidCap 400 are trading between their 20-day and 50-day moving averages. The most important conclusion that can be drawn from the analysis of the five major indices is that the market is coming into a zone of critical support. If the market holds and consolidates near the current levels then the odds favor a move higher. However, if all of the major indices lose support of the 50-day MA and the trendline, then the possibility exists for a more protracted correction.

The iShares Russell Microcap Index (NYSE:IWC) has closed below its 50-day MA for the past two sessions. Yesterday this ETF tested the April 14th swing low of $51.17 before recovering modestly. A volume fueled move back below this critical mark could provide a short entry trigger for IWC. However, since IWC has been under significant selling pressure for the past four days, we would prefer to see a small bounce and/or consolidation at the current price level as this would provide a better setup for a potential short entry.

The market continued its grind lower yesterday. Severe selling pressure in commodities, in large part due to an increase in margin requirements in the futures market, seems to have spilled over into equities.


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.


DISCLAIMER: There is a risk for substantial losses trading securities and commodities. This material is for information purposes only and should not be construed as an offer or solicitation of an offer to buy or sell any securities. Morpheus Trading, LLC (hereinafter “The Company”) is not a licensed broker, broker-dealer, market maker, investment banker, investment advisor, analyst or underwriter. This discussion contains forward-looking statements that involve risks and uncertainties. A stock’s actual results could differ materially from descriptions given. The companies discussed in this report have not approved any statements made by The Company. Please consult a broker or financial planner before purchasing or selling any securities discussed in The Wagner Daily (hereinafter “The Newsletter”). The Company has not been compensated by any of the companies listed herein, or by their affiliates, agents, officers or employees for the preparation and distribution of any materials in The Newsletter. The Company and/or its affiliates, officers, directors and employees may or may not buy, sell or have positions in the securities discussed in The Newsletter and may profit in the event the shares of the companies discussed in The Newsletter rise or fall in value. Past performance never guarantees future results.


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