A Shorting Opportunity In The Technology ETF? (QQQ, QID, QLD, TYP, EFA, DIA, SPY, IWM)

Stocks posted impressive gains on Monday amidst higher trade. Stocks gapped up strongly at the open, consolidated for most of the session and ultimately closed near session highs. All five major indices closed well in the black with higher beta issues leading the advance. By the closing bell the small-cap Russell 2000 (NYSEARCA:IWM) tacked on a whopping 4.8% gain, while both the Nasdaq (NASDAQ:QQQ) and the S&P MidCap 400 surged 3.5%. The S&P 500 (NYSEARCA:SPY) tacked on 2.9%, while the Dow Jones Industrial Average (NYSEARCA:DIA) posted an impressive 2.6% gain.

Market internals were bullish on Monday but some caution is warranted with regard to the interpretation of this data. Volume increased by 114.0% on the Nasdaq and 99.6% on the NYSE. However, compared to Friday’s half-day volume, a massive increase in Monday’s volume could reasonably be expected. It is probably more appropriate to compare yesterday’s volume with the closing volume on November 23rd (the last full trading session). When compared to last Wednesday’s results, yesterday’s volume rose by 8.3% on the NYSE but declined by 5.9% on the Nasdaq. Advancing volume overwhelmed declining volume by a whopping margin of 39.1 to 1 on the NYSE and 10.9 to 1 on the Nasdaq. Taking the adjusted volume data into account, it seems reasonable to conclude that Monday was an accumulation day on the NYSE. The same cannot be said for the Nasdaq as total volume declined session over session.

Following a seven day slide, the PowerShares Nasdaq Trust Series 1 (NASDAQ:QQQ) rallied sharply yesterday, and now appears headed for a rally back into resistance of its 20-day and 50-day moving averages. Now that we have a sell signal in the broad market, a bounce back into this zone of resistance should provide a shorting opportunity in this ETF. We are placing QQQ on the watchlist. Trade details are available to our subscribers in the watchlist segment of the newsletter. For those who are unable to short QQQ, a long position in the inverse ETF, QID, would serve as a reasonable proxy for this trade.

The iShares MSCI EAFE Index ETF (NYSEARCA:EFA) has been one of the weakest ETFs in the market over the past two months. Yesterday, EFA saw its first significant rally in the wake of a nine day selloff. A move back into resistance of the declining 20 and 50 day moving averages could present a short entry trigger for this ETF.

Despite yesterday’s opening gap down, our open position in EUO performed well for the remainder of the session, as it rallied to close near the day’s highs. For the moment we are inclined to let this trade “play out”, but are still not immune to tightening the stop should market conditions change. Yesterday’s broad market rally was impressive but in the wake of a two week selloff, it was far from unexpected. This bounce in the market should help to produce trading opportunities on the short side of 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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