S&P 500 Index May Hold The Key? (GLL, EWJ, SPY, DIA, IWM, QQQ)

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December 14, 2011 10:54am NYSE:EWJ NYSE:GLL

Stocks gapped higher at the open on Tuesday, but struggled for most of the day, and eventually closed near session lows. All five major indices closed lower on higher trade. For the second day in a row higher beta stocks led the decline. The small-cap Russell 2000 (NYSEARCA:IWM) plummeted 2.1%,

while the S&P MidCap 400 dropped 1.9%. The Nasdaq (NASDAQ:QQQ) finished down 1.3%. The S&P 500 (NYSEARCA:SPY) and the Dow Jones Industrial Average (NYSEARCA:DIA) fared slightly better as they fell 0.9% and 0.6% respectively.

Market internals ended the session on a bearish note yesterday. Volume surged across the board. Turnover on the Nasdaq and NYSE surged by 13.9% and 23.6% respectively. Declining volume topped advancing volume across the board. The spread ratio ended the session at ratio of -4.7 to 1 on the NYSE and -2.7 to 1 on the Nasdaq. Yesterday was clearly a distribution day, as prices fell while volume increased. Unlike the past two sessions, institutions controlled the day’s action.

Yesterday, EUO hit our target and we exited the trade with a solid profit. Last week we turned a nice profit on GDXJ and we are also slightly in the money on AGA. AGA appears very close to breaking out. Also yesterday, via intraday alert, we entered a long position in the ProShares UltraShort Gold ETF (NYSEARCA:GLL). Shortly after our entry, GLL broke out to set a new swing high and we are now solidly in the money on the trade. We decided to enter GLL because it was showing relative strength, as it quickly reclaimed its 5 minute high after selling off at the open. We waited for GLL to overcut Monday’s high of $17.83 and then entered the trade on a pullback. Details for this trade are available to our clients in the open position segment of the newsletter.

The iShares MSCI Japan Index ETF (NYSEARCA:EWJ) sold off sharply after attempting to reclaim support of its 20-day EMA. Further, EWJ reversed on increasing volume. A volume assisted move back below yesterday’s low of $19.15 could provide a shorting opportunity in this ETF.

The DJIA is the only index that is still holding support of its 200-day MA. The S&P 500 undercut, but managed to hold support at its 50-day MA. However, the Nasdaq sliced through, and closed below support of the 50-day MA. Further, the 20-day EMA crossed below the 50-day MA on the Nasdaq. This is generally considered a bearish signal. For the moment, the Nasdaq poses the most concern because it was unable to hold key support. It is important to note that undercuts of major moving averages are not necessarily bad. They serve to sweep stops and shake weak hands out of the market. This type of price action is generally needed for reversals to occur. But again, the fact that the Nasdaq lost support is not a good sign. Consequently, it is now key that the S&P holds support at the current level. If this broad market index loses support of its 50-day MA, we will likely see further broad based institutional distribution.

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.

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