Patience Is Warranted In The Current Environment (SMN, RTH, SPY, IWM, QQQ, DIA)

Stocks rebounded sharply from early session losses to close mixed on Thursday. By the closing bell, four of the five major indices clawed their way back into positive territory with the Nasdaq (NASDAQ:QQQ) being the only holdout. The S&P 500 (NYSE:SPY) and the S&P MidCap 400 posted gains of 0.5% and 0.4% respectively. The Dow Jones Industrial Average (NYSE:DIA) and the small-cap Russell 2000 (NYSE:IWM) both eked out gains of 0.3% while the Nasdaq was the only loser on the day as it slid 0.2%.

For a second consecutive day, market internals were mixed. Volume climbed by 3.2% on the Nasdaq and 1.2% on the Big Board. Advancing volume outpaced declining volume by a ratio of 2 to 1 on the NYSE but on the Nasdaq declining volume edged out advancing volume fractionally. Thursday’s price and volume action was just another indication that institutions appear to be back in buying mode as they once again protected key support levels.

Since setting a new swing high on October 4th, the ProShares UltraShort Basic Materials ETF (NYSE:SMN) has pulled back and undercut support just below its 20 and 50-day moving averages. A volume fueled move back above the three day high of $23.57 could present a buying opportunity in this ETF. However, due to the whipsaw action currently being exhibited in the market, we would expect any move above this key mark to be short lived.

The Retail HOLDRS ETF (NYSE:RTH) has shown excellent relative strength to the broad market during the recent selloff as it quickly reclaimed all of its major moving averages. RTH may provide a buying opportunity if it were to pullback and consolidate near support of its 200-day MA. This “tightening” of price action is what is often needed before a stock or ETF makes another advance.

Despite the fact that the market put a buy signal in yesterday, we still believe that it may make one last quick move to the downside. There are still an ample number of quality short setups available and the market rarely takes the most obvious path. Further, new leadership stock breakouts have not yet triggered and ultimately price action is the only confirmation that matters. Patience is warranted in the current environment.

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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