Markets: Bullish Reversal Candles In All Of The Major Indices? (SPY, DIA, IWM, QQQ, XRT, IYR, IXN)

Equities faded on Friday on mixed trade. Yesterday’s price action pulled all five major indices into negative territory but all five closed well off session lows. The small-cap Russell 2000 (NYSEARCA:IWM)¬†dropped 0.8%, as the S&P MidCap 400 lost 0.6%. Both the Nasdaq (NASDAQ:QQQ) and the S&P 500 (NYSEARCA:SPY)¬†shed 0.5%. The Dow (NYSEARCA:DIA) showed the most relative strength as it fell by only 0.4%.

Market internals ended the session mixed. Volume was marginally lower on the Nasdaq but ended 3.7% higher on the NYSE. Declining volume outshined advancing volume by a ratio of 2.9 to 1 on the NYSE and 1.6 to 1 on the Nasdaq. Despite the fact that internals painted a moderately negative picture of the market, the fact that all of the major averages recovered from session lows and formed distinct reversal candles, actually tips the scale in favor of market bulls. However, it was by no means an accumulation day on either index, given the mixed internals.

The semiconductor sector has shown relative strength recently, as it has been one of the top ten sectors we follow. However, on Friday this sector showed relative weakness as it closed near session lows. The strongest ETF in the semiconductor space has been the Market Vectors Semiconductor ETF. Nonetheless, it too on Friday, sold off to close near session lows. SMH could offer a buying opportunity into a pullback at the its 200-day, 50-day and 20-day moving averages. We will be following SMH closely for a possible buy entry.

Over the past four sessions, the iShares Dow Jones Real Estate Index Trust (NYSEARCA:IYR) has undercut but held support of its 200-day MA. Yesterday, IYR saw its deepest undercut of this key mark but reversed to close near session highs. A volume charged move above the four day high of $57.89 could provide a long entry trigger for IYR. We are placing IYR on the watchlist. Our members can find trade details for this setup in the watchlist section of the newsletter.

Current watchlist candidates (NYSEARCA:IXN) and (NYSEARCA:XRT) both continue to set up nicely. IXN appears to be setting up better than XRT, as it has been coiling in a very tight trading range since gapping up on January 3rd. It has traded in a one dollar and twenty cent range for ten days now. This tightening price action is encouraging. The one flaw in the IXN setup is the bearish divergence between the accumulation-distribution line and the price action over the past several months. However things can change quickly with respect to the Acc-Dist line.

Although Friday’s market action appeared bearish, all five major indices closed near their respective intraday highs and new leadership stocks continue to emerge. We are seeing the price confirmation among small-cap leadership stocks, as they broke to new highs on Friday despite the negative price action. Further, buyers have continued to hold up the bid on virtually every pullback recently. Our bullish conviction remains intact.

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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