Bearish But Not Bearish Enough? (IYT, DTO, IWM, DIA, QQQ, SPY)

Stocks lost ground on Thursday amidst higher volume. All five major indices ended in the red. The small-cap Russell 2000 (NYSE:IWM) withstood the most damage as it fell 2.0%. The S&P MidCap 400 lost 1.3% while both the Dow Jones Industrial Average (NYSE:DIA) and the S&P 500 (NYSE:SPY) shed just over 1.0%. The Nasdaq (NASDAQ:QQQ) showed the most resiliency as it contained losses at 0.8%.

Market internals were modestly bearish on Thursday. Volume rose by 10.2% on the Nasdaq but was only fractionally higher on the NYSE. However, declining volume was proportionally higher on the NYSE versus the Nasdaq. By the closing bell the spread ratio stood at 5.7 to 1 on the NYSE and 1.5 to 1 on the Nasdaq in favor of declining volume. Yesterday’s internals suggest a distribution day on the Nasdaq. The picture is a little less clear on the NYSE because of the lighter volume on this index.

Over the past three sessions the iShares Dow Jones Transportation Average Index ETF (NYSE:IYT) has shown relative weakness to the broad market. As the S&P 500 has rallied to overcut its 20-day EMA, IYT has remained below this level. Yesterday, IYT formed a reversal candle as it turned lower just prior to touching its 20-day EMA. A move below the two day low of $80.23 could present a short entry trigger for this ETF. We are following IYT carefully for a potential short entry.

Yesterday, the PowerShares DB Crude Oil Double Short ETF (NYSE:DTO) tested support of the September 1st swing low but reversed at this level and rallied to close near session highs. A move above yesterday’s high of $60.31 could present a long entry trigger for this ETF. Alternatively, a move above the two day high of $61.86 also provides a possible long entry point for DTO. When a setup like this presents itself we will often take a half position at the first trigger and add to that position above the second trigger.

Despite the bearish action on Thursday we are hesitant to make a call for a wholesale selloff today. Although volume was higher on the Nasdaq it remained about the same on the NYSE as compared to Wednesday’s level. Further, declining volume did not overwhelm advancing volume on the Nasdaq and the total volume on both indices fell well below the 50-day volume moving average. Normally we like to see reversal days accompanied by volume that is at or above the 50-day volume moving average. The lighter the volume, the weaker the signal and the more cautious we are with respect to taking on new trades.

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

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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