Here are some ETF ideas
The major indices shot higher out of the starting gate
yesterday morning, then drifted sideways to slightly lower throughout
the afternoon before finishing with temperate gains. The Dow Jones Industrial
Average brushed off last Friday’s ephemeral correction and surged 1% higher,
again closing at a fresh record high. The Nasdaq Composite and S&P 500 both
gained 0.6%, with the latter registering a new five and a half year high. The
S&P Midcap 400 rallied 0.5%, but the small-cap Russell 2000 showed relative
weakness again by advancing only 0.2%. The S&P and Dow both closed at their
intraday highs, but the lagging Nasdaq finished near the middle of its range.
The Russell diverged by concluding the session near its intraday low. Notably,
investors and traders have largely been ignoring small-cap stocks for the past
two days. The StreetTRACKS Gold Trust
(
GLD |
Quote |
Chart |
News |
PowerRating), which we highlighted as a
potential breakout above its five-month downtrend line, fell 1.9% yesterday. No
harm done though, as it never approached our trigger price for long entry.
Although
yesterday’s gains were decent, they occurred on lighter volume. Total volume in
the NYSE was 5% lower than the previous day’s level, while volume in the Nasdaq
tapered off by 2%. Obviously, it would have been better if the rally was
confirmed by higher turnover. The Nasdaq has crept higher in each of the past
three sessions, but each advance has been on declining volume. Just as their
chart patterns are better than the Nasdaq, the volume patterns of the S&P and
Dow have also been healthier. After nearly going negative ninety minutes before
the close, market internals finished moderately positive. In the Nasdaq,
advancing volume exceeded declining volume by a margin of 1.8 to 1. The NYSE
ratio was positive by 2 to 1.
The
Semiconductor Index ($SOX) gained 0.5% yesterday, but remains stuck just below
its 50-day moving average. As discussed thoroughly in yesterday’s commentary,
keep a close eye on the key support at the 444 level in the coming days. If that
level is broken, it would weigh heavily on the Nasdaq, and correspondingly the
broad market. Conversely, the $SOX could form a double bottom and reverse back
up to its high. In order to have a chance at doing so, the $SOX would need to
rally above resistance of both the three-day high and the 20-day MA, presently
at the 457 level.
When the
U.S. markets are strong, it usually pulls the international markets along with
it, and the current rally has not been an exception. A quick glance at this
week’s
ETF Trend Tracker shows that each and every international ETF we track
is currently in an ascending trend. The most recent international ETF we
discussed was the Vanguard Emerging Markets ETF
(
VWO |
Quote |
Chart |
News |
PowerRating), which we pointed out
after spotting a huge volume spike on October 16. Since then, VWO has been
consolidating near the high of its recent breakout and looks good for further
gains. Before that, in the
October 5 issue of The Wagner Daily, we brought to your attention the
breakout to a new record high in the iShares Xinhua China 25 Fund
(
FXI |
Quote |
Chart |
News |
PowerRating). FXI
has acted great over the past two weeks, trending steadily higher and gaining
nearly 3% since its October 4 breakout. In doing our nightly scanning, we came
across what may be the next international ETF to break out of a long
consolidation. Take a look at the daily chart of the iShares Hong Kong Fund
(
EWH |
Quote |
Chart |
News |
PowerRating):
First of
all, disregard the big red bar on August 16. It was caused by a cingular rogue
trade that went off way above the offer price in the first minute of trading
that day. Occasionally, that happens with both stocks and ETFs whenever an
overzealous trader bids too high above the market on an ECN (such as ARCA) right
on the open. Anyway, as you can see, EWH has been consolidating in a tight range
near its high for the past month. The pivotal breakout level is the September 20
high of 14.70, illustrated by the dashed horizontal line. Since EWH closed just
a few pennies below its pivot yesterday, there is a good chance it will test
that breakout level within the next one to two days. Although the setup is
solid, you might consider reducing your share size if you buy EWH on the
breakout. The U.S. markets are, of course, quite strong, but the major indices
remain glued to the upper channel resistance of their uptrend lines. A normal
correction down to lower channel support could cause the EWH breakout to fail.
The danger of buying breakouts at this stage is that they are basically out of
sync with the market because most of the leading stocks and ETFs have already
broken out.
Obviously, the market has been strong and remains in a steady uptrend. Overall
odds continue to favor the long side of the market, but the problem is
that nearly every ETF is now extended pretty far away from support. This creates
a negative risk/reward ratio for new long entries right now. If you’re not
already long, there are basically two options that make sense. The first is to
sit on your hands and do nothing (“SOH mode”) until low-risk long entries
present themselves again. The second option is to be prepared for capturing
short-term downside momentum of an imminent correction, but that is only
recommended for advanced traders. If the market does retrace from here, look for
the semiconductor and small-cap sectors to lead the way lower.
Tomorrow, the Federal Reserve Board meets to discuss interest rates. Virtually
nobody expects a change in rates, so this meeting may be more of a non-event
than others over the past year. Still, we don’t expect investors or traders to
throw a lot of capital at the markets until after tomorrow afternoon. If volume
dries up ahead of tomorrow’s meeting, be prepared for the choppy and indecisive
trading that generally accompanies it.
Open
ETF positions:
Long OIH, short KCE (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 .