Currency And International Etf Setups

NOTE: Please click on the charts below to enlarge them if they do not appear clearly.

The Nasdaq closed at a six-year high for the third consecutive day, but the S&P and Dow merely spun their wheels. After opening flat, stocks drifted lower throughout the morning, then reversed higher in the afternoon. The Nasdaq Composite cruised 0.4% higher, while the S&P 500, Dow Jones Industrial Average, and S&P Midcap 400 each finished unchanged. The tech-heavy Nasdaq 100 Index zoomed 0.8%, faring twice as well as its broader-based brother. The small-cap Russell 2000 gained 0.2%. Each of the major indices finished a tad below their intraday highs. For the S&P and Dow, that was just where they started the day.

Volume obviously rose well above that of the previous day's shortened session. Total volume in the NYSE increased 80% above the prior day's level, while volume in the Nasdaq registered 56% higher. As the preceding session closed three hours early, such a substantial increase was no great feat. In fact, Nasdaq volume was even lighter than Monday's pre-holiday level. Turnover in both exchanges came in below the respective 50-day average levels. Apparently, many traders have not yet returned to their desks. As such, we may need to wait until next Monday to see whether or not the market's light-volume, holiday gains are sustainable. Despite the Nasdaq's solid gain, advancing volume exceeded declining volume by less than 2 to 1. The NYSE volume ratio was flat. One positive, however, is that many market-leading stocks such as Apple (AAPL) and Research in Motion (RIMM) continued to power higher on decent volume.

Rather than analyzing the broad market's support and resistance levels again, let's take a look at a few lesser-known ETFs that may be stealthily setting up for upside breakouts. As the U.S. dollar has been weakening again, several of the currency ETFs have been forming bullish chart patterns. The CurrencyShares Euro Trust (FXE) recently broke out above its intermediate-term downtrend line and moved back above its 50-day MA. Since its long-term uptrend that began more than a year ago is still intact, FXE may be setting up for a breakout to new highs. The daily chart shows a tight-ranged bullish consolidation above its 50-day MA for the past three days. If it rallies above its July 2 high of $136.44, one might consider buying FXE:

Confirming the bullish reversal of the intermediate-term downtrend is the fact that FXE bounced perfectly off support of its long-term uptrend line. This is illustrated on the weekly chart below:

Within the same family of CurrencyShares ETF, the Canadian Dollar Trust (FXC) is setting up for a breakout to a new record high. The tight consolidation above the 20-day EMA is quite bullish, so we're stalking FXC for a potential long entry on a rally above its July 2 high of $95.02. Regular subscribers to The Wagner Daily should note the trigger, stop, and target prices that follow the commentary. The actual setup is illustrated on the chart below:

Although FXC trades with a low average daily volume, remember that liquidity is never an issue with ETFs. Unlike individual stocks, in which liquidity can greatly affect how a stock trades, all exchange traded funds are synthetic instruments. As such, the amount of average daily volume that an ETF trades is, for the most part, irrelevant. Even if a particular ETF had no buyers or sellers for several hours, the bid and ask prices would continue to move in correlation with the market value of the ETF that is derived from the prices of the underlying stocks. An ETF with a low average daily volume may sometimes have slightly wider spreads between the bid and ask prices, but you can simply use limit orders if this is the case. We trade for points, not pennies, so paying a few cents more on occasion is not a big deal.

While on the subject of foreign-correlated ETFs, the iShares Hong Kong Index (EWH) is another that is setting up for a substantial breakout. The iShares Xinhua China 25 (FXI), which tracks mainland China's equivalent of the Dow, has been on a tear for quite some time. However, day-to-day volatility in the Shanghai market may be beyond the comfort level of some investors and traders. If so, the more established and regulated Hong Kong market is another way one can participate in the Asian markets. With an average daily volume of 3 million shares per day, EWH is also traded heavily by institutions. Below is its weekly chart:

In May of this year, EWH briefly popped above its prior high from January (the dashed horizontal line), but the initial test of resistance failed. Rather than subsequently falling sharply, EWH retraced just a little, then consolidated in a tight range for five more weeks. This week, it moved back above resistance at $17.07 and is poised for a weekly close at a new high. The March shakeout down to its 40-week MA (and its 200-day MA) increases the odds this breakout attempt sticks. As such, we are looking for a potential long entry above yesterday's high.

In the domestic market, the Nasdaq 100 Index Tracking Stock (QQQQ) still looks good and is buyable on a pullback. Just be sure to place a protective stop not far below the breakout level of $47.87. Again, caution is recommended until we see the return of normal volume levels.

Open ETF positions:

Long - (none)
Short - EWO, KCE, XLE

NOTE: Regular subscribers to The Wagner Daily receive daily updates on the open positions above, as well as new ETF trade setups, including trigger, stop, and target prices. Intraday e-mail alerts are also sent on as-needed basis.

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. Wagner is currently working on this third book, scheduled for publication in early 2008.

For a free trial to the full version of The Wagner Daily above, which includes detailed ETF trade setups and daily position updates, or to learn about our other newsletters, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com .

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