Which Way Will The Markets Go? (IYZ, DUST, SPY, DIA, IWM, QQQ)

Stocks lost ground on Friday on higher trade. Friday’s lower close resulted in mixed results for the major indices in 2011. The Dow Jones Industrial Average (NYSEARCA:DIA) finished just over 5.0% higher in 2011, while the S&P (NYSEARCA:SPY) ended flat and the Nasdaq (NASDAQ:QQQ) slid almost 3.0%. Overall, it was an unimpressive year for stocks. On Friday however, the Dow Jones Industrial Average showed the least resiliency as it fell 0.6%. The S&P MidCap 400 and the small-cap Russell 200 (NYSEARCA:IWM) both dropped 0.5%. The S&P 500 slid 0.4% while the Nasdaq contained losses to 0.3%.

Technically speaking, market internals were bearish on Friday. However, due to pre-holiday light volume trade, it is difficult to definitively categorize price action in this type of environment. In the absence of massive reversal candles and/or volume that is close to its 50-day moving average, it is likely unreasonable to consider Friday a true distribution day. Tuesday’s price and volume action should provide a much better read on the current state of the market.

On Friday we entered a long position in the iShares DJ US Telecom Sector ETF (NYSEARCA:IYZ) as it broke above the six day high, on its biggest uptick in volume in nearly two weeks. Normally, we would not have entered this trade on the Friday of a holiday weekend, but IYZ had recently undercut all of its moving averages and broke out on reasonably high volume. In combination, both of these factors provide evidence that the trade is much more likely to hold. Trade details are available to our subscribers in the open positions section of the newsletter. This trade was sent via intraday alert and was not on the watchlist.

The Direxion Daily Gold Miners 3x Bear ETF (NYSEARCA:DUST) recently exploded above all three of its major moving averages. However, over the past two sessions, DUST has come under considerable selling pressure and is now approaching support of its uptrending 20-day exponential moving average. An undercut of this key support level could provide a buying opportunity in this inverse ETF.

Now that the holidays are behind us, volume should begin returning to the market. Hopefully we will also get a better read on market direction. For the moment, our bias is modestly bullish. The fact that the S&P 500 and DJIA are hovering near breakout levels is promising for the long side of the market. Nonetheless, we have both long and short positions on the watchlist so that we might capitalize on a sharp move in either direction.

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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