3 potential ETFs setups
A less than stellar earnings report from Alcoa (AA) on
the first major day of earnings season triggered an opening gap down in the
broad market. Buyers immediately stepped in and enabled the major
indices to rally higher and “fill the gap,” but the bears arrived back on the
scene and took control just after mid-day. As stocks began to retrace the
morning recovery, news of a small plane crashing into a New York City building
briefly sent the market sharply lower. With one hour remaining, stocks began to
rebound after initial fears of terrorism abated, but the technical damage from
the afternoon selloff was already done. The major indices finished the wildly
erratic session near the middle of their intraday ranges and with modest losses
across the board. Both the S&P 500 and Nasdaq Composite lost 0.3%, while the Dow
Jones Industrial Average slipped 0.1%. The small-cap Russell 2000 fell 0.6%, but
the S&P Midcap 400 declined only 0.2%.
For the
first time in several weeks, both the S&P and Nasdaq registered bearish
“distribution days” by selling off on higher volume. Total volume in the NYSE
was 6% above the previous day’s level, while volume in the Nasdaq increased by
13%. Given that the major indices have been pushing against upper channel
resistance of their daily uptrend lines for several days, it was not surprising
to see a bit of healthy selling into strength. Tuesday’s session, which we
suggested was an institutional “churning” day, was also a warning sign that
preceded yesterday’s weakness. When turnover increases without substantial
corresponding price gains, it often leads to losses the following day. This is
what has happened over the past two sessions. The advancing volume to declining
volume ratio was negative yesterday, but only by a margin of less than 3 to 2 in
both exchanges.
After a
whipsaw session like yesterday, you’re better off focusing your ETF trading
efforts on specific industry sectors with relative strength or weakness rather
than the broad-based ETFs. Daytraders who attempted to trade the likes of SPY or
QQQQ yesterday were likely caught on the wrong side of the trend several times.
With that type of action in its wake, today’s session may be equally as
indecisive. So, let’s take a look at a few sector ETFs that are likely to hold
up well regardless of the broad market’s direction, including two that may even
breakout if the market cooperates. We’ll start with the Retail HOLDR
(
RTH |
Quote |
Chart |
News |
PowerRating):
As you
can see, RTH has been consolidating in a sideways range for the past month and
closed yesterday near the high of that range. Since it is trading at its 52-week
high, there is also minimal overhead supply to contend with. We like the idea of
buying a breakout above the high of its trading range (marked by the dashed
horizontal line on the chart above).
Recently, we mentioned that the tight consolidation in the Semiconductor Index
($SOX) would likely lead to a strong move in either direction, but it was
difficult to tell which direction it would be. Because of its 200-day moving
average overhead, we predicted the next move in the associated Semiconductor
HOLDR
(
SMH |
Quote |
Chart |
News |
PowerRating) might be to the downside, so we sold it short. Unfortunately for
that position, the $SOX suddenly began to show relative strength and
outperformed with a solid 1.3% gain yesterday. The sudden strength in the $SOX
stopped out us out of the SMH short position, but our tight trailing stop still
enabled us to realize a small profit. Despite being stopped out on the short
side, it now appears that SMH is about to break out sharply above that 200-day
MA and has actually become a potential long setup. Professional traders are not
emotionally tied to any positions and are conditioned to purely react to the
charts. Potentially switching from the short to the long side like this is one
such example. Note, however, that we would only buy SMH if it
convincingly clears the high of its consolidation and the 200-day MA (which has
converged with the high of the range). Even then, buying such a breakout would
require a tight stop just below the 200-day MA to protect against a failed
breakout:
Quality
short setups are really few and far between right now, but one that caught our
interest is the streetTRACKS Capital Markets
(
KCE |
Quote |
Chart |
News |
PowerRating). Yesterday, news that
Bank of America planned to offer free online trading to its customers had a
negative impact on online trading firms, many of which are represented in this
ETF. Although KCE has been in a steady uptrend, it gapped down sharply on
yesterday’s news and closed below its 10-day moving average (the purple line on
the chart below) for the first time since its current rally began one month ago.
This resulted in the bulls getting trapped, and should also attract the short
sellers today. This is known as a “breakaway gap” to the downside:
If you
are planning to sell short KCE, you must be aware of the fact that it could
easily snap back above its 10-day MA and resume its uptrend if it turns out that
yesterday’s selloff was just a knee-jerk reaction. As such, the safest entry
point would be on a break of yesterday’s low. Waiting for it to break the low
would confirm the new-found weakness that could realistically send KCE back down
to its 50-day moving average. Regular subscribers will see our exact trigger,
stop, and target prices on this setup below.
Open
ETF positions:
Long
(
BBH |
Quote |
Chart |
News |
PowerRating), short
(
UTH |
Quote |
Chart |
News |
PowerRating) (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 .