Wagner Daily: A Closer Look At These ETFs (AMJ, DIA, BZQ, XOP, KOL, EEV)

In Wednesday’s trading, the major indices made swift and powerful advances that put the bears on the defensive. All five indices closed the session up over 2%. Further, the Dow and the S&P 500 rallied decisively out of a ten day trading range. We discussed in the November 26th newsletter that, “the Dow and the S&P 500 most likely hold the key to the next significant move in the market”. Today’s move probably takes the market higher. The only cautionary sign was the decline in volume. The Dow Jones Industrial Average led the rally by posting a robust 2.3% gain. The S&P 500 and the small-cap Russell 2000 both advanced by 2.2%, while the Nasdaq and the S&P MidCap 500 both realized gains of 2.1%. Virtually all industry groups participated in the rally.

Volume was muted when compared to yesterday’s price action. Day over day volume declined on both the NYSE and the Nasdaq. NYSE turnover dropped over 9%, while the Nasdaq saw volume lighten by 7.8%. Although Wednesday’s advance was not accompanied by heavy volume, the advancing volume to declining volume ratio on both indices was decidedly positive. Advancing volume overwhelmed declining volume on the NYSE and Nasdaq by factors of 13 to 1 and 6 to 1 respectively.

Our position in the Proshares Ultrashort MSCI Brazil (NYSE:BZQ) hit its stop and we exited the trade yesterday. Three new long positions were entered on Wednesday (one inversely correlated). They include: The SPDR Oil & Gas Exploration ETF (NYSE:XOP), the Market Vectors-Coal ETF (NYSE:KOL) and the ProShares Ultra Short Emerging Markets ETF (NYSE:EEV). For our members, trade details can be found in the open positions matrix.

In the November 30th newsletter we provided the following commentary on the Dow; “Yesterday’s price action on the Dow Jones Industrial Average could qualify as shakeout move. It is not uncommon to see an undercut of a major moving average during a pullback in an uptrend. A decline below a key moving average that reverses quickly, “sweeps” the weak hands from the market and often results in a short squeeze that fuels the next advance. It is too early to tell whether or not this is the case for the Dow, but it does serve as an important signal that must be closely monitored. Under no circumstance do we trade from this signal in isolation. The price action over the next several days must be used in conjunction with the possible shakeout candle to determine whether or not the odds favor the resumption of the prevailing trend. For example, a big volume gap up at today’s open would be a good indication that the uptrend may continue. A gap up after yesterday’s reversal would likely create a state of panic among bears”. A review of the charts below provides evidence of the potential power behind this technical setup.

POTENTIAL OUTCOME (Nov. 30th Newsletter Reflecting Closing Data From Nov. 29th)

ACTUAL OUTCOME (Dec. 1st Closing Data for (NYSE:DIA))

The JPMorgan Alerian MLP ETN (NYSE:AMJ) has been consolidating in a tight trading range for the past 10 days. Despite its underperformance yesterday, AMJ has held very good relative strength to the market during this time frame. It was much stronger than the market last week. AMJ has been exhibiting all of the characteristics of a market leader. A gap up above the December 1st high or a test of the 50-day MA could provide a buying opportunity for this ETF. We will be monitoring AMJ for a possible long entry.

Given the powerful price action yesterday, we anticipate follow through to the upside. It would not be unusual to see the market consolidate or pull back some today, as is often the case after an explosive move. An increase in volume over the next few days would provide further evidence that the market is prepared for another advance.

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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