3 ETFs with good upside momentum

News of North Korea’s missile testing
caused the major indices to gap open
below their prior day’s lows,
but stocks maintained equilibrium throughout the remainder of the session. With
ninety minutes remaining, the broad market attempted to rally, but the bears
regained control in the final hour. Relative weakness in the tech arena caused
the Nasdaq
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to slide 1.7%. Both the small-cap Russell 2000
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and S&P Midcap 400 indices similarly sustained losses of 1.5%. Strength in Oil,
the only major sector to close higher, helped reduce the losses in the S&P 500
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and Dow Jones Industrial Average
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, both of which lost 0.7%.

Since the stock market closed early in the previous session,
turnover was obviously a lot higher yesterday. Total volume in the NYSE
increased by 103%, while volume in the Nasdaq was 115% higher than the previous
day’s level. As of 1:00 pm EDT, which is when the markets closed on Monday,
volume in the Nasdaq was 14% higher and the NYSE was 5% higher. Therefore, we
could reasonably conclude that yesterday was a bearish “distribution day.”
Negative market internals confirmed the institutional selling. In the Nasdaq,
declining volume exceeded advancing volume by more than 6 to 1, while the NYSE
ratio was negative by 3 to 1.

In the beginning of last week, we pointed out three different
ETFs that were showing relative strength and mentioned they were good candidates
for further upside momentum. All three of those ETFs have indeed continued to
advance since then, but each one has rallied to a key resistance level that will
likely result in a pullback. If you bought any of them and are still long, you
may consider tightening your stops or selling into any further strength. In no
particular order, those ETFs were: StreetTRACKS Gold Trust
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, the U.S.
Oil Fund
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, and the iShares Xinhua China 25 Index
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. We have
illustrated each of those resistance levels on the daily charts below. First,
take a look at GLD:



We bought GLD on June 21 when it closed above resistance of
its six-week downtrend line. We explained to subscribers that our upside price
target was simply a retracement up to resistance of the 50-day moving average.
As you can see, GLD closed yesterday right below that 50-MA. We already sold
half of the position into strength on July 3 and intend to sell the rest on any
test or probe above the 50-MA. Alternately, we will take profits on the
remaining shares if GLD begins to lose support of its two-day consolidation.
Next is a chart of USO, which mirrors the price of the Crude Oil commodity:



We pointed out the setup in USO when it closed above its
downtrend line on June 27. Since then, momentum has carried it steadily higher,
but it closed yesterday at horizontal price resistance of its prior high from
May 11. Most likely, USO will take a rest and either consolidate or pullback
before breaking out above that level. If you’re not willing to hold through any
potential correction or want to play it conservatively, consider taking profits
here. Last is FXI:

 

Just like GLD and USO, momentum from a break of its downtrend
line enabled FXI to cruise steadily higher over the past two weeks. However, FXI
has already begun to correct. It gapped down yesterday and failed to recover
intraday. Support of the 50-day MA converges with yesterday’s low, which is
positive, but be careful with FXI if it fails to hold above that 50-MA.

Despite yesterday’s correction in the broad market, our
short-term bias remains bullish overall. Many leading stocks are holding their
recent gains and breakouts are still holding. The S&P 500 slid back below its
50-day MA, but the 200-day MA is just below yesterday’s low. Unless it drops
back below the 200-MA, we would not aggressively mess with the short side of the
market. We’re certainly not “out of the woods,” and our intermediate-term bias
remains bearish, but it seems the market still has enough momentum for
continuation of the recent rally.


Open ETF positions:

Long IYR, TTH, and GLD (regular subscribers to

The Wagner Daily

receive detailed stop and target prices on open positions and detailed setup
information on new ETF trade entry prices. Intraday e-mail alerts are also sent
as needed.)

Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of
Morpheus Trading Group (morpheustrading.com),
which he launched in 2001. Wagner appears on his best-selling video, Sector
Trading Strategies (Marketplace Books, June 2002), and is 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. He is also a frequent guest speaker at various trading and
financial conferences around the world. For a free trial to the full version of
The Wagner Daily or to learn about Deron’s other services, visit

morpheustrading.com
or send an e-mail to

deron@morpheustrading.com
.