Cautious Optimism For The Short Run In The Markets (EUO, EWJ, SPY, DIA, IWM, QQQ)

Stocks began the day on strong footing but faded into the close to end the session mixed. The small-cap Russell 2000 (NYSEARCA:IWM) both managed to close higher by 0.6% and 0.3% respectively. The Nasdaq (NASDAQ:QQQ) ended the session barely above the breakeven mark, while both the Dow Jones Industrial Average (NYSEARCA:DIA) and S&P 500 (NYSEARCA:SPY) closed fractionally lower. During the session all three of these indices were up by over 1.0%.

For the second session in a row market internals were mixed. Volume dropped on the Nasdaq by 10.0%, while it increased on the Big Board by 4.1%. Declining volume edged out advancing volume on the Nasdaq by a ratio of 1.1 to 1, while on the NYSE advancing volume outpaced declining volume by a factor of 1.4 to 1.

Our position in ProShares UltraShort Euro ETF (NYSEARCA:EUO) continues to act well as it has tested and held support of the 20-day EMA. Also notice that the price action in EUO noticeably diverged from the Accumulation/Distribution technical indicator during the recent pullback. The Accumulation Distribution (by price and volume) indicator uses the relationship between the open and the close of the price bar, and the range of the bar, to determine whether the combination of price and volume should be characterized as Accumulation (buying pressure) or Distribution (selling pressure). The use of both price and volume provides an important insight with respect to the interaction of the two, thus revealing a different perspective as opposed to analyzing each independently. The calculation of Accumulation Distribution is a running total and therefore, the trend direction (relative value), of Accumulation Distribution is more important than its numeric value (absolute value). A divergence between price and Accumulation Distribution is often used as a leading indicator that a trend reversal may be nearing. Since this indicator is generally considered a leading indicator it can provide a signal that a trend reversal may be underway well in advance of the actual reversal. Therefore, it is generally not used in isolation to predict reversals. Other indicators such as moving averages, support levels, oscillators and reversal candles are typically used in conjunction with Accumulation Distribution to provide a more accurate confirmation as to the timing of the potential price reversal. In the case of EUO, the Accumulation Distribution indicator is suggesting that EUO is being accumulated despite its recent drop in price.

Yesterday, on increasing volume, Japan ETF (NYSEARCA:EWJ) overcut its 20-day EMA but reversed to close near session lows. EWJ also found resistance at the three day high of $9.43. A move below the two day low of $9.30 could present a shorting opportunity for this ETF.

Although the stock market spiked sharply last week in response to the central banks coordinated drop in interest rates, it is interesting to note that rates on two and ten year Italian bonds continue to hover near 7%. The seven percent level is what’s generally considered unsustainable for the Italian economy. Further, the yield on three year bonds in France actually went up in last week’s auction. This suggests that the market is still nervous about the situation in Europe, and although the short term liquidity crisis may have been averted, the longer term prospect is still considered shaky. This type of bond market action also suggests that volatility may still remain persistent in the stock 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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