These 5 ETFs are ready to move, here are the entries

The broad market continued to build
on its recent losses Thursday
, as small and
midcap stocks again sustained the largest losses. The major indices hung out
near unchanged levels throughout the first half of the day, but they fell to new
lows in the afternoon. A small wave of buying during the final thirty minutes
lifted the broad market off its intraday lows, but each of the major indices
still suffered another day of losses. The Nasdaq Composite
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COMP |
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, smallcap
Russell 2000
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RUT |
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, and midcap S&P 400
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MDY |
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each lost 0.9%. The S&P 500
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and Dow Jones Industrial Average
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both suffered their fourth
consecutive day of losses and closed lower by 0.4% and 0.3% respectively. The
one positive is that the major indices closed off their worst levels of the
session, but the technical damage to the charts grew deeper.

Turnover increased across the board Thursday, causing both the
S&P and Nasdaq to register another bearish “distribution day.” Total volume in
the NYSE increased by 12%, while volume in the Nasdaq was 8% higher. Volume
levels in both exchanges also came in well above average levels. Market
internals were again firmly negative. Yesterday was the fourth straight day of
higher volume losses in the S&P, clearly indicating that institutions have been
running for the exit doors this week.

The benchmark S&P 500 Index is beginning to look pretty
bearish on both its daily and long-term monthly charts. On the daily, it has
closed below the ever-important 200-day moving average for the past two days and
also remains below its prior low from August. But a break below support of a
multi-year trendline on the monthly chart is likely the real culprit of the
broad market’s sharp losses this week. Looking at the monthly chart below,
notice how the S&P has fallen below support of its uptrend line that has been in
place since the low of March 2003:



Remember that a prior support level will always become the new
resistance level after the support is broken. As such, expect the S&P to have a
difficult time recovering back above that uptrend line on any rally attempt.

The Nasdaq Composite looks better than the S&P on its charts,
but it too is beginning to fall apart. It probed below its 200-day moving
average on an intraday basis yesterday and also closed below its September low.
Its downtrend that began with the high of August 3 remains intact, as the index
has since set two “lower highs” and three “lower lows:”



Obviously, the 200-day moving average is a pivotal area of
support on the Nasdaq. If it falls below it, all three of the major indices will
be trading below their 200-day MAs, which would indicate a long-term bearish
sentiment. Interestingly, the Nasdaq is clinging to support of its multi-year
uptrend line on its monthly chart, which converges with the 200-day MA on the
daily chart. The S&P has already fallen below its monthly uptrend line, so will
the Nasdaq follow suit as well?



The sectors that were leaders of the last major broad market
rally continue to lead the way lower in the current correction.
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IWM |
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(smallcap
Russell 2000), which doubled from March 2003 to July 2005, has fallen
approximately 5% in only the past three days. We covered half of our IWM short
position yesterday at the 63.20 area when it hit our initial profit target of
the 200-day moving average, but will continue trailing a stop lower on the
remaining shares. MDY (midcap S&P 400), which moved in lockstep with IWM on the
way up, has sold off just as sharply this week.

Institutional money has also begun to leaving other former
market leading industries such as Oil, Utilities, Real Estate, Home
Construction. Each of those sectors now present ideal short entry points on any
significant bounce. Corresponding ETFs to consider are:
(
OIH |
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(Oil
Services),
(
UTH |
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or
(
XLU |
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(Utilities), and
(
IYR |
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or
(
ICF |
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(Real
Estate). As mentioned two days ago, you need to make your own “synthetic ETF”
for the Home Construction sector. The 20-MA on the 60-minute chart roughly marks
resistance of the hourly downtrend lines on each of those sectors, so a rally
into that level could present a good short sale entry point for a short-term
trade. Also consider shorting a rally into resistance of the 50-day moving
averages on any other sectors that have fallen below their 50-day MAs this week.
On the upside, spot gold closed at a fresh 17-year high yesterday, pulling
(
GLD |
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(Gold Trust) along with it. We remain long GLD and will continue trailing a stop
to maximize gains and lock in profit.


Open ETF positions:

Long GLD and short half 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
.