Don't Forget About The Bond Etfs

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

Stocks got off to a scary start yesterday morning, but a surprise three-quarter point rate cut by the Fed helped avert a potentially nasty decline. After gapping approximately 5% lower on the open, the major indices quickly began to see buying interest that lasted throughout the morning. Many stocks filled their opening gaps by mid-day, then chopped around in a sideways range throughout the rest of the session. Both the S&P 500 and Dow Jones Industrial Average slid 1.1%, while the Nasdaq Composite lost 2.0%. Small and mid-cap stocks showed relative strength for a change. The Russell 2000 and S&P Midcap 400 indices were off by just 0.2% and 0.5% respectively. Despite the substantial closing losses, the bullish morning reversal enabled all the main stock market indexes to finish in the upper third of their intraday ranges.

Turnover in both the NYSE and Nasdaq climbed 2% above the previous day's levels. Again, volume in both exchanges rose to its highest levels in months. Nevertheless, the higher volume losses were not necessarily bearish because most of the volume spike occurred during the morning rally off the lows. Though stocks did not quite manage to erase all of their opening losses, it was positive they held onto their morning gains all afternoon. Further, declining volume in the NYSE exceeded advancing volume by only a fractional margin. The Nasdaq adv/dec volume ratio was negative by 4 to 1.

Going into yesterday fully positioned in cash enabled us to be nimble and take advantage of the morning strength. When stocks began rallying immediately after the opening gap down, we quickly compared the intraday charts of the major indices. Upon doing so, we noticed the most relative strength in the small-cap Russell 2000 Index. Specifically, it was showing the smallest percentage loss of all the indexes and also held near the top of its intraday range when the S&P and Nasdaq pulled back slightly. As such, we sent a real-time e-mail alert to subscribers of The Wagner Daily, informing them of our decision to buy the ProShares Ultra Russell 2000 (UWM). Unlike the more popular iShares Russell 2000 (IWM), UWM is designed to move at twice the ratio of the underlying Russell 2000 Index. This provides us with more "bang for the buck" when trading the broad-based ETFs.

For maximum safety in buying morning reversals, it's best to wait for the main stock market indexes to breakout to new highs after the first twenty minutes of trading. However, in this case, we made a judgement call to buy UWM based on a very positive reward/risk ratio. With a lot of potential ground to recover on the upside, and a protective stop just below the opening low, the potential profit was much greater than the downside risk if UWM hit our stop. Since trading is merely a numbers game, we focus only on trade setups that have positive risk/reward ratios. UWM acted well throughout the day, and is already showing a marked to market gain of 2.5 points since our entry. In order to protect our profit while maximizing the gain, we plan to trail a stop higher in today's session. UWM is only intended to a be a short-term momentum trade off the lows, as we are not expecting anything more than a bounce of 1 to 3 days. Our upside price target is resistance of the 10-day MA, around the $50 level.

Because bond prices are inversely correlated to interest rates, yesterday's rate cut had a positive effect on the prices of the fixed-income ETFs. The iShares 20+ year T-bond (TLT) was just one of numerous fixed-income ETFs that broke out to a new multi-year high yesterday. The breakout to a new high is shown on the daily chart below:

Trend traders sometimes forget about the fixed-income ETFs because they have a low volatility. However, don't forget substantial dividends are paid on a monthly basis as well. This is a major benefit to investing in the fixed-income ETFs. When in steady uptrends, as most of the bond ETFs are now, one gets the dual benefit of both price appreciation and monthly dividend payouts. It also provides a relative safe-haven for parking capital in bear markets, especially for those who are may not be comfortable with short selling.

In one sense, it's positive that stocks erased most of their early losses yesterday. But when one considers the desired effect of the surprise three-quarter point rate cut, the intraday action was not overly impressive. Consider, for example, what might have happened had the Fed not attempted to save the market with that surprise pre-market announcement. The five percent opening losses would likely have grown worse throughout the session. Still, we'll take yesterday's action for what it's worth -- an ugly start with an encouraging finish. Combined with the test of the long-term 38.2% Fibonacci retracement levels illustrated in yesterday's commentary, stocks could easily stabilize and move higher in the short to intermediate-term, but the long-term trends remains firmly bearish.

Open ETF positions:

Long - UWM
Short - (none)

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.

<< My Home | TheMoneyBlogs Home

• It's Not Armageddon. . .
• Basic Materials Sector Forming Short-term Bottom
• Disappointed? Yes. Discouraged? No.
• Stop! Hammer Time!
• Japanese Yen ETF Setting Up For Buy Entry

• October 2008
• September 2008
• August 2008
• July 2008
• June 2008
• May 2008
• April 2008
• March 2008
• February 2008
• January 2008
• December 2007
• November 2007
• October 2007
• September 2007
• August 2007
• July 2007
• June 2007
• May 2007
• April 2007
• March 2007
• February 2007

• PowerRate Your Favorite Stock Today!
• Morpheus Trading

• In The Money

• Weekly Recap: One For The Recordbooks