This ETF is poised to break out

Although Tuesday’s bearish reversal
positioned the market for tradeable follow-through to the downside
,
the major indices resumed their pattern of indecision by recovering a majority
of their losses from the previous day. The S&P 500 gained 0.6%, the same amount
it fell in the prior day. The Nasdaq Composite
(
COMP |
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again lagged behind
and gained only 0.4%. The Dow Jones Industrial Average
(
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PowerRating)
advanced 0.7%,
the S&P Midcap 400 rallied 0.8%, and the small-cap Russell 2000 closed 1.2%
higher. Inverse of the previous day’s action, each of the major indices closed
near their intraday highs.

Unfortunately for the bulls, turnover unilaterally declined
yesterday. Total volume in the NYSE was 10% lighter than the previous day’s
level, while volume in the Nasdaq was lighter by the same amount. Internals were
positive, although more so in the NYSE than the Nasdaq. Advancing volume
exceeded declining volume by nearly 7 to 2 in the NYSE, but was only positive by
about 1.4 to 1 in the Nasdaq. The fact that volume declined when the markets
rallied is bearish, especially considering that the previous day saw a session
of distribution in both exchanges.

When the U.S. markets enter longer-term choppy and indecisive
periods, better ETF trading opportunities can be found in the international
sectors. Unfortunately, however, most of the international ETFs have broken out
long ago and do not provide a positive risk/reward ratio for entry at current
levels. But one exception is EWM, the iShares Malaysia Index. As the longer-term
weekly chart below illustrates, EWM has been consolidating in an “ascending
triangle” chart pattern for the past two years:



EWM has clearly had trouble with breaking out above the $7.50
area, but each attempt has been followed by a “higher low.” In the big picture,
we view this is a bullish consolidation that may soon lead to a long-term
breakout to new highs. A rally above the July 2005 closing high of $7.56 would
represent the breakout point. Just be sure to keep in mind that you are looking
at a weekly chart and not a daily chart. As such, this type of trade
setup is more ideal for longer-term accounts, such as an IRA, as opposed to an
actively traded “swing” account.

As for the shorter-term in the broad market, it is positive
that the S&P 500 initially bounced off support of its prior high at the 1,295
level. The problem, however, is that the other broad-based indices have a more
convoluted technical picture that is looking more indecisive every week. The
Nasdaq, in particular, has become a major “chop-fest” that has been whipsawing
traders on both the long and short side. Obviously, we will eventually see broad
market follow-through in the form a break out or break down, but it is
imperative to avoid aggressive trading with a lot of positions until that
happens. This is one of those periods where patient traders who do nothing are
eventually rewarded, while those who overtrade will inevitably regret it.


Open ETF positions:

Short IWM, IGW, and EWZ (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
.