Emerging Market Weakness (EWW, EWJ, DIA, IWM, SPY, QQQ)

Stocks climbed for a second consecutive day as volume faded. All five major indices posted gains. Both the S&P MidCap 400 and the small-cap Russell 2000 (NYSE:IWM) advanced 1.4%. The S&P 500 (NYSE:SPY) and the Dow Jones Industrial Average (NYSE:DIA) added 1.3% while the Nasdaq (NASDAQ:QQQ) improved by a more modest 0.9%.

Market internals ended the session mixed. Volume faded by 12.7% on the Nasdaq and 8.5% on the Big Board. However, for a second consecutive day, advancing volume was higher than declining volume across the board. On the NYSE the ratio of advancing volume to declining volume ended at 3.3 to 1 and on the Nasdaq it finished at 2.4 to 1. Due to the higher close we would classify yesterday as a follow through day but the lack of volume suggests that institutions were not particularly active in yesterday’s advance. Consequently, we would not classify Wednesday as an accumulation day for the broad market.

Yesterday, the iShares MSCI Mexico Investable Market ETF (NYSE:EWW) saw a wide trading range as it gapped down, reversed and overcut the previous day’s high but eventually sold off to close near session lows. Further, the overcut also occurred above the 20-day EMA and likely served to sweep weak hands and poorly placed stops. A move by EWW back below yesterday’s low of $55.78 could present a shorting opportunity in this ETF. We are monitoring this position closely for a possible short entry

As the broad market has moved higher over the past two days, the iShares MSCI Japan Index ETF (NYSE:EWJ) has demonstrated relative weakness as it has remained trapped in a five day trading range. A volume fueled move below the five day low of $9.42 could present a short entry trigger for EWJ.

Yesterday EWM triggered from the watchlist and we are now short this ETF. The market continued to show some signs of life yesterday but we maintain our bearish stance. For the moment we would not be surprised to see the market rally for several days on the heels of a massive selloff.

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: deron@morpheustrading.com.

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