A Bounce For The Bears? (XLI, DTO, SRS, DIA, QQQ, SPY, IWM)

Stocks posted solid gains on Monday but on mixed trade. In a whipsaw session stocks began the day higher but sold off until 10:30 at which time the market caught a bid, steadily climbed until noon, reversed again and sold off until 2:00pm and then rallied sharply into the close. All five major indices closed near session highs. There was a noticeable divergence between the Nasdaq (NASDAQ:QQQ) and the other major indices however. The Dow Jones Industrial Average (NYSE:DIA) led the charge as it posted a strong 2.5% advance while the S&P 500 (NYSE:SPY)¬†tacked on 2.3%. The small-cap Russell 2000 (NYSE:IWM)¬†improved by 2.0% and the S&P MidCap 400 tacked on 1.9%. The Nasdaq was the day’s laggard as it added a more modest 1.3%.

Market internals were mixed for a second consecutive session. Volume plummeted by 26.1% on the NYSE but closed fractionally higher on the Nasdaq. Advancing volume topped declining volume by a margin of 8.8 to 1 on the NYSE and by 2.3 to 1 on the Nasdaq. Given the poor volume, we would not classify yesterday as an accumulation day for either the NYSE or the Nasdaq.

The PowerShares DB Crude Oil Double Short ETF (NYSE:DTO) has shown excellent relative strength to the broad market. Over the past two months DTO easily held support of both the 50-day and 20-day moving averages prior to its breakout move last week. Further, DTO is one of only a few inverse ETFs that moved above its August swing high during last week’s breakout. A pull-back to the ascending 20-day EMA could provide a buying in this ETF.

Yesterday, on lighter volume, the S&P Select Industrial Sector SPDR ETF (NYSE:XLI) rallied to fill the gap formed on September 22nd. XLI is now very close to major resistance at its 20-day EMA, 50-day MA and September 16th swing high. A move back into this zone of resistance could provide a short entry trigger for this ETF.

Via an intraday alert we entered a small position in the ProShares UltraShort Real Estate ETF (NYSE:SRS) as it bounced after holding support at the 200-period MA on the 60-minute chart. We took small size and placed a tight stop since we considered this an aggressive entry. Trade details are available to our clients in the watchlist segment of the newsletter.

The market reversed sharply yesterday but in the absence of significant volume it is difficult to view the move as more than just a bounce in the wake of a week of viscous selling. We remain focused on identifying short setups into any bounces the market provides.

In order for the market to stabilize and set up the next rally it is likely that we need a capitulation day of 4-5% across all major indices. Typically capitulation involves a massive spike in volume, 800-1000 stocks down four percent or more, 90% down volume, 90% of stocks down on the day and relentless selling into the close. The capitulation day should then be followed by a massive reversal day which catches market bulls off guard. Typically, only with this type of price action, can a bottom be put in the market.

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: [email protected]

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