Wagner Daily: Respect The Trend But Watch For Signals (IYF, TUR, DBB, EEV, EIDO, IWM, QQQ, DIA, SPY)

Stocks fell hard on Friday closing at both the session and weekly lows. The market fell under severe selling pressure for most of the day before showing some signs of life at 2:00 pm. However, the afternoon recovery was short lived as stocks sold off sharply into the close. The selling was broad based and resulted in all five major indices ending the day lower by over 1%. The small-cap Russell 2000 (NYSE:IWM) led the move lower by shedding 1.6%. The Nasdaq (NASDAQ:QQQ) and the S&P MidCap 400 both fell 1.5% while the Dow Jones Industrial Average (NYSE:DIA) and the S&P 500 (NYSE:SPY) slid 1.4% each.

Market internals were unquestionably bearish on Friday. Volume rose across the board. Turnover expanded by 17% on the Nasdaq and by 13.3% on the NYSE. Declining volume overpowered advancing volume by a factor of 5.2 to 1 on the NYSE and 5.8 to 1 on the Nasdaq. The relentless nature of the selling accompanied by the expansion in volume clearly suggests institutional participation in Friday’s plunge. Consequently we would classify the session as a distribution day for the market.

On Friday we covered our short position in (NYSE:DBB) and sold our long position in (NYSE:EEV) locking in solid gains for both trades. We exited both trades as we felt it was wise to lock in gains into weakness. Also on Friday, we shorted (NYSE:TUR) as this watchlist candidate hit its entry trigger. For our subscribing members details for each of these trades are available in the open positions section of the newsletter.

The iShares US Financial Sector Index ETF (NYSE:IYF) has been under enormous selling pressure since early February. Yesterday, on a large expansion in volume this ETF undercut a two year support level and quickly returned to the previous day’s trading range. This price action resulted in the formation of a reversal candle as IYF closed in the top third of its intraday trading range. Although we have no interest in going long IYF, Friday may have marked a short term bottom for this ETF. IYF may present a shorting opportunity with a bounce back into resistance at the 20-day and 200-day moving average.

On Friday the iShares MSCI Indonesia Investable Market ETF (NYSE:EIDO) gapped down sharply and closed below its trendline for the first time in six months. The sudden break of the trendline suggests that EIDO may be falling victim to overall market weakness. A move back below Friday’s low of $30.88 may present a shorting opportunity in this ETF. Irrespective of EIDO’s overall relative strength, it may still be drug down by the relentless selling pressure in the broad market. This setup provides a potential example of why it is unwise to fight the broad market trend.

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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