Bullish Consolidation Pattern In The Materials AlphaDEX ETF

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May 12, 2011 9:06am NYSE:EWJ NYSE:FXZ

Stocks sold off sharply on Wednesday amidst brisk trade. Stocks were under pressure from the opening bell and were unable to gain traction at any time during the session. Four of the five major

 indices closed down more than 1% with the Nasdaq being the sole holdout. The small-cap Russell 2000 (NYSE:IWM) took a significant beating as it closed down by 2%. The S&P 500 (NYSE:SPY) and the S&P MidCap 400 both slid 1.1% while the Dow Jones Industrial Average (NYSE:DIA) fell by just over 1%. The Nasdaq (NASDAQ:QQQ) lost 0.9% on the session.

In an abrupt reversal of Tuesday’s action, market internals turned decidedly bearish. Volume was up across the board as the market tumbled. Declining volume took firm command as institutions were eager to liquidate. The ratio of declining volume to advancing volume ended the day at 5.9 to 1 on the NYSE and 2.7 to 1 on the Nasdaq. Total volume on the Nasdaq finished higher by 11.6%. Turnover was up by almost 16% on the NYSE. Given the breadth of the selling and the pick-up in volume, Wednesday would be considered a distribution day for the market.

Due to yesterday’s brisk selling, we made a judgment call to sell our position in PWV before it hit our stop. We didn’t like the abrupt nature of the reversal and felt it was prudent to liquidate the position with a small loss.

Since late February the First Trust Materials AlphaDEX ETF (NYSE:FXZ) has been setting a sequence of higher lows as it has been testing resistance at $26.15. Notice that each pullback has become smaller as FXZ consolidates. This type of price action is considered bullish. Should this ETF hold support near the current uptrend line its next test of the $26.15 resistance level could very well result in a breakout move to new highs. We will continue to monitor FXZ for a possible long entry.

Since losing support in mid March the iShares MSCI Japan Index ETF (NYSE:EWJ) has fought its way back above the 20, 50 and 200 day moving averages. Over the past ten trading days EWJ has stalled at this level and has tested support at $10.38 three times. A volume fueled move below this key mark could provide a shorting opportunity in this ETF.

Commodities resumed their downward trek yesterday. Silver, Oil, Agriculture and emerging markets took the brunt of Wednesday’s punishment. The market appears locked in a “discussion” between bears and bulls with the outcome yet to be determined. For the moment we remain in an uptrend but the recent crack in commodities appears to be weighing on 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]

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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