In yesterday’s technical ETF trading commentary, we listed a handful of European ETFs that have been showing relative strength by breaking out in recent weeks. However, the strength has not been limited to Europe. Emerging Markets ETFs have also been outperforming by breaking out above resistance levels, even as the US broad market chops around in an indecisive range. The strength in Emerging Markets ETFs can be seen on the daily chart pattern of Direxion Emerging Markets Bull 3X ETF (NYSEARCA:EDC), a leveraged ETF comprised of a basket of stocks from emerging regions:
On the chart above, notice that $EDC just broke out above horizontal price resistance to close at its highest level since May of this year (albeit on lighter volume). By comparison, the S&P, Nasdaq, and Dow are still approximately 3 to 5% below their prior highs from September. When a stock or ETF is exhibiting such relative strength that it manages to breakout to new highs, even while the benchmark indexes are still trading firmly below their prior highs, what you think happens when the major indices eventually bounce higher? The stocks and ETFs with relative strength are typically the first to rocket much higher. Conversely, even if the broad market starts heading back down, equities with relative strength will generally pull back less than the main stock market indexes, and will be among the last to succumb to broad-based selling pressure. This is the basic concept of relative strength trading, which forms an important part of our ETF swing trading strategy (you may wish to check out my ETF trading books for further details on this system).
Since yesterday’s breakout level (prior resistance) in $EDC should now serve as the new area of support, aggressive active traders may consider buying EDC if it pulls back to near support of the breakout level. However, we are not adding $EDC to our “official” ETF Watchlist at this time. Although the $EDC breakout is decent, we have been seeing an increasing number of false breakouts in the market. As such, we first need to start seeing some follow-through in our existing positions, and leading stocks in general, before assuming more exposure in our model ETF trading portfolio.
We concluded yesterday’s commentary by saying, “Since volume in the stock market usually dries up substantially starting the week before Christmas holiday, there is really only just over one week of active trading left this year.” However, given the apathetic price action of the past several days (leading stocks and ETFs have not been making significant headway, nor have weak equities been falling apart), it is starting to feel like the lazy holiday trading season is upon us a bit early this year. Unfortunately, there’s nothing we can do about it other than monitoring existing positions for any required changes to stop or target prices. Successful traders know they can only take what the market gives them; those who try to force trades in less than ideal conditions and when the broad market is showing mixed signals will eventually give back their hard-earned profits from the easier trading environments. A focus on capital preservation, rather than large profits, is not a bad idea right now.