Silver ETF is Setting Up

Another choppy day left most stocks
little changed ahead of this week’s meeting of the Federal Reserve Board.
The major indices broke out to new intraday highs just after mid-day,
promptly fell to new lows only an hour later, then recovered slightly in the
final two hours of the session. The S&P 500 lost 0.1% for the second consecutive
day, while the Nasdaq Composite gained 0.2%. The Dow Jones Industrial Average
was unchanged, but the small-cap Russell 2000 and S&P Midcap 400 indices showed
relative strength again, rallying 0.6% and 0.4% respectively.

Total volume in the Nasdaq declined by 4%, but turnover in the
NYSE was 2% higher than the previous day’s level. Although the S&P 500 declined
on higher volume, both the small percentage of the gain and the minimal volume
increase enabled the S&P to avert a bearish “distribution day.” The Nasdaq’s
lower volume gain tells us that institutions remained largely on the sidelines.
Not surprisingly, market internals were mixed. Declining volume in the NYSE
marginally exceeded advancing volume by a ratio of 1.1, but the Nasdaq was
positive by a margin of 1.3 to 1.

We are presently long the StreetTRACKS Gold Trust
(
GLD |
Quote |
Chart |
News |
PowerRating),
which is consolidating above an 8-month downtrend line, but the iShares
Silver Trust
(
SLV |
Quote |
Chart |
News |
PowerRating) is setting up for a low-risk entry point as well.
Five days ago, SLV gapped up and broke out above resistance of both its 50-day
moving average and its prior high from January 3. Since then, it hasn’t done
much, but has been holding above the breakout level:

As long as SLV remains above convergence of its 50-day MA and
January 3 high, the setup offers a good risk/reward ratio. If it falls back
below the 50-day MA by more than a point or so, you can quickly sell the
position for a small loss. However, the upside potential is much greater than
the one-point risk. If the breakout holds, it could eventually make a run at its
prior high from December 2006. When the dollar amount of the potential profit is
much greater than the capital risk, a trade is said to have a highly positive
risk/reward ratio. By focusing on such trades, one can still realize a
substantial bottom-line profit, even if the accuracy rate of the picks is not
very high. In order to increase the odds of SLV breaking out above its January
high, consider waiting for a breakout above its hourly downtrend line. A rally
above that level should tip the odds in favor of further upside. The downtrend
line is illustrated on the 60-minute chart below:

As for the broad market, nothing has changed on a technical
level since yesterday’s analysis of the major indices. Both the S&P and Dow are
holding just above their 50-day moving averages, while the Nasdaq closed a hair
below. The Feds kick off a two-day policy meeting today, the results of which
will be announced tomorrow afternoon. Even though the FOMC is widely expected to
leave interest rates unchanged, we don’t anticipate a lot of action ahead of
Wednesday’s announcement. Nevertheless, remember to
trade what you see, not what you think!

Open ETF positions:

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 .