The Fed and No Man’s Land (XLU, EPP, EEV, SPY, DIA, IWM, QQQ)

Stocks sold off yesterday but closed well off session lows. All five major indices closed in the red but the day’s price action was not entirely bearish as the Nasdaq 100 ($NDX.X) found its way into positive territory by the close. The Nasdaq (NASDAQ:QQQ) continued to show relative strength to the other indices as it posted a modest 0.4% decline while both the Dow Jones Industrial Average (NYSE:DIA) and the S&P 500 (NYSE:SPY) slid 1.0%. Smaller cap stocks were the day’s losers as the S&P MidCap 400 and the Russell 2000 (NYSE:IWM) dropped 2.1% and 1.7% respectively.

For the second consecutive day market internals were mixed. Volume plummeted in the wake of quadruple witching Friday. Turnover on the Nasdaq was down almost 30.0% while on the Big Board it fell by just over 40.0%. Declining volume outpaced advancing volume by a margin of 6.7 to 1 on the NYSE and 4.0 to 1 on the Nasdaq. The significant decline in volume and the intraday reversal suggest that selling had no institutional backing.

The SPDR S&P Utilities Select Sector ETF (NYSE:XLU) has been showing excellent relative strength since recovering from the late July-early August selloff. Over the past three sessions this ETF has been consolidating near its 52-week high and is well above all major moving averages. A volume fueled move through resistance at $34.07 could result in a breakout to new highs.

The iShares MSCI Pacific ex-Japan ETF (NYSE:EPP) appears to have found a short term bottom as it formed its second reversal candle in the past four days during yesterday’s session. A rally back into resistance of the declining 20-day and 50-day moving averages could present a shorting opportunity in this ETF.

Within the first thirty minutes of action yesterday we decided to sell half of our position in (NYSE:EEV) for a healthy 7.0% gain. With that type of move on the books it made sense to take some profits. We remain in the other half of the EEV trade and are still in the full position of EUO.

The search for quality setups last evening was excruciating. The market really appears to be in no man’s land. Strong stocks are going higher, most are languishing and weak stocks are going lower. There’s weakness in oil, copper, emerging markets, Europe and the EURO. Semiconductors, Biotechnology and technology appear to have short term relative strength. At the present we have little interest in going long but short setups are not clear cut and the risk-reward ratio is not in our favor on the few setups we found. We are also cognizant of the Fed meeting and the possibility that another round of quantitative easing is on its way. As such we are cautious about taking on new positions and wouldn’t be surprised if the market were to take another leg higher. For the moment we suggest patience as the market sorts out its next move.


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: [email protected]

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