Wagner Daily: Bearish Divergence In The iPath Grains ETF (IYZ, JJG, DIA, IWM, SPY)

Stocks struggled for a third consecutive session but managed to pare losses in the afternoon. All five major indices ended the day lower on mixed trade. For the third time this week both the small-cap Russell 2000 (NYSE:IWM) and the S&P MidCap 400 led the move lower. By the closing bell the Russell had plunged 1.2% while the S&P MidCap 400 dropped almost 1%. The Dow Jones Industrial Average (NYSE:DIA) and the S&P 500 (NYSE:SPY) both lost 0.7% yesterday. The Nasdaq showed the most resiliency as it shed 0.5% yesterday

Market internals ended the session mixed. Turnover was fractionally lower on the Nasdaq but ended the day higher by 5.4% on the Big Board. Declining volume held the upper hand throughout the day on Wednesday. The declining to advancing volume ratio finished at 2.9 to 1 on the NYSE 1.3 to 1 on the Nasdaq. Despite the flat volume on the Nasdaq, Wednesday could likely be categorized as a distribution day for the broad market. Institutions were clearly participating in the selloff on the NYSE.

The iShares Dow Jones US Telecom ETF (NYSE:IYZ) has demonstrated impressive relative strength over the past three sessions. As the broad market has been moving lower, this ETF has been consolidating near its 52 week high. A pullback and undercut of the 20-day EMA followed by a several days of consolidation could provide a possible long setup for IYZ. We will be monitoring IYZ closely for a long entry given its recent resiliency.

The iPath DJ-UBS Grains Total Return Sub-Index ETN (NYSE:JJG) has been showing a bearish divergence between price action and the accumulation/distribution technical indicator. Since March, as the price of this ETF has been moving higher (or consolidating), the accumulation/distribution histogram has been in a downtrend. This suggests that this ETF could be experiencing distribution by institutional players. A volume assisted move below yesterday’s low of $52.65 could present a shorting opportunity in this ETF.

The broad market continued to struggle for a third consecutive day on Wednesday. Small and mid cap stocks continue to show relative weakness to large cap issues. Nonetheless, all of the major indices are still holding support above their respective 20-day and/or 50-day moving averages.

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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