Selling Into Strength; Ultra Crude ETF Showing Weakness (UCO, DTO, XLP, DIA, SPY, IWM, QQQ)

Stocks ended Tuesday’s high volume session virtually flat.  The Dow Jones Industrial Average (NYSEArca:DIA) and the S&P MidCap 400 slid 0.16% and 0.1% respectively.  The S&P 500 (NYSEArca:SPY) finished marginally lower, while the Nasdaq (NASDAQ:QQQ) ended the session fractionally higher. The small-cap Russell 2000 (NYSEArca:IWM) closed flat.  Sectors exhibiting the most relative strength were gold, biotech, real estate, transportation and emerging markets.  Underperformers on the day included, natural gas, oil, banking, solar energy, insurance and healthcare.

Market internals ended the session mixed.  Volume surged by 6.3% on the Nasdaq and 20.7% on the NYSE.  For the first time in recent memory, advancing volume and declining volume finished at equilibrium on both exchanges.  Tuesday was a strange trading day.  Initially it appeared as if bears were going to wrestle control of the market but a spurt of afternoon buying propelled the major indices back to the middle of their intraday ranges.  The virtually flat price action near the highs of the two week trading range, combined with the jump in volume is indicative of “churning”.  Often, when markets reach extremes, spikes in volume will occur but have little effect on price action.  The churning type action may suggest that institutions were selling into strength.  Typically, when stocks are consolidating, they do it on light volume.  When big spikes in volume cannot illicit a proportional movement in price, this can serve as a leading indicator that the market may reverse.  Churning is a subtle clue that a market may be due for a correction.

Over the past twenty trading sessions the ProShares Ultra Dow Jones AIG Crude ETF (NYSEArca:UCO) has been quietly exhibiting a bearish divergence with the S&P 500.  Should the broad market turn lower for a few days, UCO could lose support due to its relative weakness.  In addition, UCO formed a bearish reversal candle yesterday on a dramatic spike in volume.  A drop below yesterday’s low of $39.79 could present a shorting opportunity.  We like this short setup and are adding it to the watchlist.  Trade details are provided in the watchlist section of the newsletter.   The fact that commodities are not as highly correlated to the market is what allows us to consider this counter-trend setup.  For those of you trading qualified accounts or those who cannot borrow shares to short UCO, buying the PowerShares DB Crude Oil Double Short (NYSEArca:DTO) is the inverse alternative to shorting UCO.

Yesterday, our long position in (NYSEArca:XLP) hit its stop to the penny and we exited the trade.  IYZ and IYT formed solid reversal candles as they recovered off their session lows.  DVY seems to be struggling as it closed in the bottom half of its intraday range.  If the market weakens, DVY would be the most likely of the three to hit its stop.  There is some reason for concern over yesterday’s volume and price action.  If institutions were selling into strength, a pullback may be on the horizon.  However, it would be premature to label one day of possible distribution into strength as a sell signal.  That would be an overreaction.  There have not been enough distribution days in the market to call out the bears.  Further, our bias remains bullish and we therefore view any pullbacks as potential buying opportunities.  However, it is acceptable to seek opportunities in ETFs demonstrating relative weakness or strength when they hold a lower correlation to the broad 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

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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