3 ETFs with good relative strength

The broad market chopped around in a
sideways range throughout most of Wednesday’s session, but buyers
stepped in during the final ninety minutes of trading and lifted most stocks
into positive territory. Both the S&P 500
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gained 0.6%, while the Dow Jones Industrial Average
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Small and mid-cap stocks showed relative weakness again, as the Russell 2000 and
S&P Midcap 400 indices eked gains of 0.2% and 0.1% respectively. Each of the
major indices finished at their intraday highs and the S&P 500 even recovered a
majority of the previous day’s loss. The Nasdaq, however, only retraced
approximately one-third of its prior day’s drop. Blame that on the Semiconductor
Index ($SOX), which lost another 0.6% and closed at a fresh seven-month low.

Lower turnover across the board prevented the broad market
from registering a bullish "accumulation day" yesterday. Total volume in the
NYSE declined by 2%, while volume in the Nasdaq was 10% lighter than the
previous day’s level. From June 16 through 23, the price to volume ratios in the
market were positive overall. During that period, the S&P 500 had five days of
losses and one day of gains, but each of the "down" days were on lighter volume,
while the "up" day was on higher volume. However, the market has not been
performing as well "under the hood" since then. The S&P 500 has closed higher in
two of the past three sessions, but it did so on lighter volume. Conversely, the
sole "down" day was on higher volume, indicating institutional selling. The
volume patterns have turned negative over the past several days, but it is
important to note that turnover in both exchanges has come in below the 50-day
average levels in each of the past eight days. The lighter than average volume
levels may be concealing the true intentions of the "smart money," but we will
likely see a spike in volume after this afternoon’s FOMC announcement on
interest rates. The direction of the broad market during the next volume spike
will help us to determine the direction in which stocks will mostly likely trade
in the near-term.

Over the past several days, we have pointed out three
different ETFs that were showing relative strength or setting up for potential
long entries. Those ETFs were the United States Oil Fund
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Xinhua China 25 Fund
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yesterday’s close, both USO and FXI continue to act well, while EWW remains in a
trading range. Steadily rising crude oil prices over the past two weeks have
enabled USO to break out above its secondary downtrend line that had been in
place since the high of May 2. However, it still must overcome resistance of its
primary downtrend line just above that. Its recent double bottom should help to
generate some upside momentum:

Unfortunately, strong technical patterns in USO are sometimes
rendered irrelevant due to geopolitical news and speculation coming out of the
Middle East. Nevertheless, the breakout above its secondary two-month downtrend
line is bullish and should at least lead to a probe above the primary downtrend
line, perhaps more. If you take a shot at USO on the long side, consider placing
a protective stop just below the prior downtrend line. Remember that prior
resistance acts as the new support level after the resistance is broken.

While the S&P 500 has rallied only 0.1% over the past three
days, FXI has actually gained 2.1%. We mentioned the relative strength and break
of FXI’s downtrend line in the June 26 issue of
The Wagner Daily and
it has steadily moved higher since then. If you’re currently long FXI and are
only interested in a short-term play, consider selling into strength near the
50-day moving average, presently at 75.67:

Expect a lot of volatility in the final hours of today’s
session. The Federal Reserve Board will announce their decision on interest
rates at 2:15 pm EDT, and whipsaw action in both directions is expected after
that time. As mentioned yesterday, we continue to avoid entering new ETF
positions ahead of the Fed announcement. However, we are considering several
ETFs on both the long and short side of the market, depending on how the market
reacts to the interest rate announcement. The unbiased technical picture is that
each of the major indices remain below resistance of their seven-week downtrend
lines, so odds obviously favor lower prices. But a shock from the Feds could
easily invalidate the technicals. Stay alert and don’t fall in love with your
opinions. The actual facts of the interest rate announcement are irrelevant; all
that matters is the market’s reaction to the announcement.

NOTE REGARDING HOLIDAY HOURS: In
celebration of Independence Day on July 4, the U.S. equities markets will close
at 1:00 pm EDT on Monday, July 3. The entire session will be closed on Tuesday,
July 4. The Wagner Daily will be published as usual on Monday, but will
not be published on Tuesday. Regular publication will resume on
Wednesday, July 5. Enjoy the holiday!

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