Waiting For A Bounce To Pounce (XLB, EPI, IWM, SPY, QQQ, DIA)

Stocks posted strong gains on Thursday but on light trade. Despite Thursday’s significant move equities remain in a wide four day trading range. All five major indices closed higher on the session. The small-cap Russell 2000 (NYSE:IWM) and the S&P MidCap 400 led the move higher by posting gains of 5.4% and 5.3% respectively. Both the Nasdaq (NASDAQ:QQQ) and the S&P 500 (NYSE:SPY) tacked on 4.6% while the Dow Jones Industrial Average (NYSE:DIA) added just under 4.0%.

For a second straight day market internals were mixed. Volume dropped by 7.6% on the Nasdaq and 16.0% on the Big Board. However, the ratio of advancing volume to declining volume ended the session at an impressive 32 to 1 on the NYSE and 29 to 1 on the Nasdaq. Despite an impressive price move in the market, the absence of volume suggests a lack of institutional participation in the rally. This also helps to explain why the market was unable to break out of the four day trading range.

During the recent market plunge, the S&P Select Sector Materials SPDR ETF (NYSE:XLB) sliced through support of all of its moving averages and its long term uptrend line. Over the past several sessions XLB has been rallying back toward these former support levels which should now serve as resistance. An “overcut” of the former uptrend line and/or the 20-day EMA could provide a short entry trigger for XLB. We will continue to monitor XLB closely for a possible short entry near these key marks.

The Wisdom Tree India Earnings ETF (NYSE:EPI) has been a downtrend since November of 2010. In early May EPI lost support of its 200-day MA and has been trading below this key mark ever since. Further, during the most recent market downturn, this ETF dropped below a key support level near $22.00. EPI now faces formidable resistance into any rallies and could offer a shorting opportunity with a move into its down trending 20-day EMA.

Volatility continues to dominate the market and is considered quite bearish. For a market to repair itself after a massive selloff, an extended period of low volatility is generally required. The longer that volatility is present, the more likely the market will remain under downward pressure. Consequently we continue to focus on identifying potential short setups into a rally.

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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