Wagner Daily: Short Setups On A Bounce (GMF, VPL, SPY, IWM, QQQ, DIA)

Following Tuesday’s momentary reprieve, the market resumed its relentless decline on Wednesday as all five major indices closed down on expanding volume. The Nasdaq (NASDAQ:QQQ) plummeted 1.8% while the S&P 500 (NYSE:SPY) and the small-cap Russell 2000 (NYSE:IWM)¬†both¬†shed 1.7%. Both the Dow Jones Industrial Average (NYSE:DIA) and the S&P MidCap 400 ended the session off by 1.5%. The selling was broad based as virtually every major industry group participated in the decline.

Market internals were clearly bearish on Wednesday. Volume spiked by over 15% on the Nasdaq and by 18% on the NYSE. Declining volume overwhelmed advancing volume by a factor of 12 to 1 on the Big Board and 9.4 to 1 on the Nasdaq. The spike in volume suggests that Institutions were the force behind the decline. Based on the increase in volume and the bearish spread ratio, we would classify Wednesday as a distribution day for the market.

We covered our short position in TUR yesterday into the opening gap down. Given the size of the gap down we felt that it was prudent to cover the trade to lock in a gain of over three points. Many of the technical indicators that we use are showing oversold readings for the broad market.

The SPDR S&P Emerging Asia Pacific ETF (NYSE:GMF) recently lost support of its long term uptrend line (May 13th). Further, GMF has set a sequence of three lower lows and two lower highs suggesting that a trend reversal may be underway. If GMF is unable to reclaim support of its long term uptrend line a more sever reversal may be underway. This ETF could offer a shorting opportunity into a bounce near the uptrend line and the 200-day MA. However, if the market does not bounce in the next couple of days GMF could fall quickly to the late March swing low.

The Vanguard MSCI Pacific ETF (NYSE:VPL) formed a reversal gap yesterday. VPL is now testing support for the second time in three weeks. A drop below $53.70 could provide a short entry for this ETF.

We are now flat and are actively looking for short setups. Given the extreme nature of the recent selling we are more apt to be patient and wait for a bounce in the market to find new short candidates rather than chase ETFs that are likely over-extended to the down side. We are also looking for ETFs that have demonstrated relative strength as possible long candidates into a bounce.

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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