6 currency ETFs to watch

  • October 31, 2006
  • Deron Wagner

The Nasdaq recovered half of its
previous day’s loss yesterday, but both the S&P and Dow finished near
unchanged levels. Overall intraday price action was a bit indecisive, as stocks
gapped down on the open, trended reversed higher into mid-day, but fell from
their highs in the final ninety minutes of trading. The Nasdaq Composite and
small-cap Russell 2000 indices each rallied 0.6%, but both the S&P 500 and Dow
Jones Industrial Average were flat. The S&P Midcap 400 gained 0.2%. The S&P and
Dow showed a bit of relative weakness by closing near the middle of their
intraday ranges, but the Nasdaq finished in the upper third of its range.

Although lighter volume in last Friday’s selloff enabled the
major indices to dodge a bearish “distribution day,” a second straight day of
declining turnover prevented the Nasdaq from registering a bullish “accumulation
day” yesterday. Total volume in the Nasdaq was 21% lighter than the previous
day’s level, while volume in the NYSE saw a more tepid decline of only 8%.
Matching the divergent price action, market internals in the NYSE were nearly
flat, but advancing volume in the Nasdaq exceeded declining volume by a margin
of more than 3 to 1.

After scanning extensively for new quality ETF setup patterns
last night, we were nearly left with an empty list. Most ETFs remain extended
way above key support levels, making them risky buys right now. If these strong
ETFs continue their correction that started last Friday, we will soon see buying
opportunities, but we can’t be certain that stocks will correct much further in
the short-term. We feel we are already positioned in the best setups, as we are
presently long the StreetTRACKS Gold Trust (GLD) and the Oil Service HOLDR (OIH),
both of which are forming bottoms and forming reversal patterns. On the short
side, we have the Semiconductor HOLDR (SMH), one of the only ETFs that is well
below its 52-week high and therefore has a lot of overhead resistance. But after
scanning every nook and cranny for something fresh, we noticed that many of the
Currency ETFs are trying to break out. This relatively new type of ETF enables
you to capture moves in the currency markets with the same simplicity of trading
a stock. Below is a list of these ETFs that currently exist:

Recent weakness in the U.S. dollar has enabled many of the
above ETFs to show signs of life. The Australian Dollar Trust (FXA), for
example, just broke out above resistance to a new high. Take a look at the
weekly chart:

You will notice that FXA, along with most of these ETFs, does
not trade a lot of volume on an average day. But unless you are a daytrader,
this really doesn’t matter. Remember that all ETFs are synthetic instruments
that move up and down in correct correlation to the price of the underlying
instrument, which in this case is the currency market. Unlike stocks, ETFs are
not traded in an auction system of supply and demand, so liquidity is never an
issue. The only thing to be aware of is the occasional wide spread, but this can
be countered through the use of limit orders.

As for the broad market, it seems to be in a short-term
transition right now. Stocks corrected firmly last Friday, but did so on lighter
volume, which is bullish. However, yesterday’s bounce in the Nasdaq occurred on
even lower volume, which means the buyers may be drying up too. It may be a bit
challenging to “scare up the profits” on either side of the market today, so we
are continuing to tread lightly and maintaining a cautiously neutral stance
overall.

Open ETF positions:

Long GLD and OIH, short SMH (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 .