Fixed-Income Bond ETFs Poised For Breakout

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

After trending modestly lower throughout the morning, stocks reversed into positive territory in the afternoon, but a sell-off during the final hour of trading caused the major indices to close lower and near their intraday lows. Both the Nasdaq Composite and Russell 2000 indices lost 0.4%, the S&P 500 declined 0.3%, and the Dow Jones Industrial Average slipped 0.1%. The S&P Midcap 400 bucked the trend by holding on to a 0.2% gain. It was a choppy and indecisive day overall, but the bears won in the end. Just as stocks often finish near their intraday highs in a bull market, it's common for the major indices to see closing weakness in a downtrending market.

The one positive of yesterday's session is that the losses occurred on lower turnover. Total volume in both the NYSE and Nasdaq was 7% lighter than their respective levels of the previous day. Tuesday's lighter volume gains showed that institutions were not in a hurry to jump back into stocks, but yesterday's losses on lighter volume indicated traders were not aggressively dumping shares either. Market internals were not bad considering the weak closing action. Advancing volume in the NYSE was on par with declining volume, but the Nasdaq ratio was negative by just over 2 to 1.

One group of ETFs we have not discussed recently, but is getting a lot of buying interest, is the fixed-income T-bond ETFs. Tied to the price of various government treasuries, the T-bond ETFs offer investors a great way to participate in the bond market, with the same simplicity and low transaction cost of trading any other stock or ETF. Not only do the prices of the fixed-income ETFs move in sync with the underlying bonds, but the ETFs also pay regular dividends, just the same as if you invested directly into a bond. Because they continue to grow in popularity, iShares now offers seven different Treasury Bond ETFs, along with seven additional corporate or government credit bond ETFs. The complete list of all fourteen fixed-income ETFs is on the iShares web site, but let's just look at the iShares 20+ year T-bond (TLT), one of the oldest and most popular fixed-income ETFs:

After breaking out above its intermediate-term downtrend in mid-February, TLT surged higher and peaked on February 27. As you may recall, that is the day the major market indexes slid more than 3%. As money rotated out of equities, it went into "safer" instruments like the T-bonds. As the market has moved lower since then, TLT has been consolidating near its high in a tight, sideways range. Barring a sharp bullish reversal in the stock market, TLT will most likely break out above this range and make another leg higher within the next several days. Technically, there is resistance all the way up to the peak of February 27, but it is an anomaly that resulted from a sharp spike that day. Therefore, we would buy TLT just above the high of the six-day range, which is $90.50. The fixed-income ETFs don't offer a lot of price volatility, but they are great instruments for IRAs and other retirement accounts because the biggest benefit of trading or investing in them is the monthly dividend payments.

At its afternoon peak yesterday, the S&P 500 was trading above its previous day's high and looked as though it would attempt to rally to its 38.2% Fibonacci retracement level at 1,407. The problem, however, was relative weakness in the Nasdaq, which never made it above Tuesday's high. This bearish divergence in the Nasdaq was one of the reasons the market moved lower into the close. In addition to the 23.6% Fibonacci retracement level we have discussed over the past several days, we also mentioned that the 40-period moving average on the 60-minute chart frequently acts as resistance in strong trending markets. As you can see on the chart below, the Nasdaq ran into resistance of that 40-MA yesterday, triggering the late-day reversal:

The S&P 500 initially showed relative strength to the Nasdaq by rallying above its 40-MA yesterday afternoon, but the broad-based closing weakness caused the index to finish back below it. Both indices also settled below their 23.6% Fibonacci retracement levels. This begs the question, "Is that all the bounce we get?" Yesterday's intraday price action was certainly negative, but it still may be too soon to expect a rapid drop down to the prior lows. If the S&P and Nasdaq get a surprise pop back above yesterday's highs, watch the 38.2% Fibonacci retracement levels, which should provide rather low-risk entry points for new short positions. That equates to 1,407 on the S&P 500 and 2,408 on the Nasdaq Composite.

Open ETF positions:

Long SDS, TWM, short UTH (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 .

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