I like the idea of shorting this ETF

The major indices kicked off the week
with an opening gap Monday
morning,
but stocks subsequently drifted in a lethargic, sideways range throughout the
session. Tech stocks showed slight relative strength for a change, enabling the
Nasdaq Composite
(
COMP |
Quote |
Chart |
News |
PowerRating)
  to gain 0.3%, but the S&P 500
(
SPX |
Quote |
Chart |
News |
PowerRating)
 
lost 0.2%. The Dow Jones Industrial Average
(
DJX |
Quote |
Chart |
News |
PowerRating)
edged 0.1% lower, as did
the small-cap Russell 2000 Index. The S&P Midcap 400 fell 0.3%. Like the
previous day, the broad market showed a lack of direction into the close.

As we often see on narrow-range consolidation days, turnover
declined across the board. Total volume in the NYSE was 26% lower, while volume
in the Nasdaq was 23% lighter than the previous day’s level. Market internals
were mixed. In the NYSE, declining volume exceeded advancing volume by a ratio
of approximately 3 to 2. The Nasdaq’s ratio was positive by nearly the same
margin.

Recently, we mentioned that several of the international ETFs
had begun correcting, which we felt would be a drag on the U.S. markets as well.
EWZ, the ETF that tracks the Brazilian markets, was one such ETF that we felt
had entered a corrective phase. When we last discussed EWZ two weeks ago, it had
corrected down to support of its 50-day moving average. Since then, it has
bounced off the 50-MA, but has begun rolling over again and is now back below
its 20-day MA. The resulting pattern has formed a bearish

“head and shoulders” pattern
, the right shoulder of which is now being
formed. We have labeled the components of this pattern on the daily chart of EWZ
below:



Because of the “head and shoulders” pattern EWZ is showing, we
like the idea of shorting it near its current level. If you want to play it
conservatively, the stop could be over the high of the right shoulder, around
the 42.50 area. However, an absolute stop should be set just above the high of
the head, around the 43.30 area. As for a downside target, we expect EWZ to at
least retest support of its neckline at the 38.50 area. However, if the neckline
is broken, we could expect a downward move equal to the distance from the top of
the head down to the neckline. In this case, that equates to a move of nearly 5
points. That would make an ultimate downside target of around 33.50 on EWZ.
Obviously, patience may be required for this setup, but it’s not a problem as
long as you have your stop is in place. Other international ETFs like FXI (iShares
Xinhua China 25 Fund) are showing similar “head and shoulders” chart patterns as
well.

As for the broad market, yesterday’s action did little to
change the short-term technical picture. The same support and resistance levels
we discussed in yesterday’s Wagner Daily remain valid today. Due to
divergence within the major indices and a myriad of mixed signals in the broad
market, we remain neutral on the short-term overall market direction. At times
like these, remember to keep the number of open positions to a minimum and/or
reduce size on all new trade entries. When the indices begin to trade in sync
with each other, that will be the time to resume normal trading operations.


Open ETF positions:

Short IGW, IWM (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
.