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iSharesChina Failing Its Breakout?
NOTE: Click on the charts below to enlarge them if they do not appear clearly.
As with every other day last week, stocks showed intraday indecision on Friday, but finished the session little changed. The S&P 500 declined 0.4% on its third consecutive day of losses, but the index fell a total of only 0.6% during that period. The Nasdaq Composite took a break from its recent relative strength by also losing 0.4%. Both the Dow Jones Industrial Average and small-cap Russell 2000 Index slid 0.3%, but the market-leading S&P Midcap 400 Index was unchanged. Most of the major indices closed near the middle of their intraday ranges. For the week, there was a bit of divergence in the stock market. The Nasdaq Composite gained 0.8%, while the Dow Jones was lower by 0.9%. The broad-based S&P 500 lost 0.3%.
The positive of last Friday's session is that the losses occurred on slightly lower turnover. Total volume in the NYSE declined by 2%, while volume in the Nasdaq was 1% lower than the previous day's level. The lower volume losses prevented both the S&P and Nasdaq from registering a "distribution day," but remember that the NYSE exhibited bearish signs of "churning" last Wednesday and Thursday. Despite the lighter volume levels, market internals were negative in both exchanges. Declining volume in the Nasdaq exceeded advancing volume by a margin of just under 2 to 1. The ratio in the NYSE was negative by nearly 3 to 2.
Recently, we pointed out the "symmetrical triangle" chart pattern that was forming in iShares China (FXI). In the beginning of last week, it began to break out of its triangle to the upside, but we avoided buying the breakout because it seemed to lack the proper momentum. Based on how it finished the week, it looks like we made the right decision. Take a look:
Initially, our intended long entry was a rally above the February 8 high of $107.50, but we passed on entry because volume failed to significantly increase when it moved above that prior high on February 21. As you can see, it formed a "doji star" candlestick the following day, then promptly fell 2.4% on Friday. Since FXI appears to have failed the breakout, it makes an ideal short setup. Instead of merely falling below the lower trend channel of the triangle, it first rallied above the upper channel, drawing in the bulls. Now that the bulls who bought the breakout are trapped, it should increase the downward momentum if/when FXI breaks down. Since FXI already closed just below support of both its 20 and 50-day moving averages, we like it for short entry about 30 to 40 cents below last Friday's low. A protective stop could be placed just above the high of February 23 (over the February 22 high if you want to play it a little looser). Support of the January 10 low, around $98, is a realistic downside price target.
On the upside this week, we continue to keep an eye on the Semiconductor ETFs. The StreetTRACKS Semiconductor (XSD) and PowerShares Dynamic Semiconductor (PSI) have both already broken out, but the benchmark Semiconductor HOLDR (SMH) has not yet done so. Nevertheless, a breakout above resistance in SMH could lead to substantial gains because it has been trading in a sideways range for seven months. The longer a stock or index trades in a sideways range, the more powerful the eventual breakout or breakdown becomes. Again, we are watching for a rally above the October 16, 2006 high of $35.95. The dashed horizontal line on the weekly chart below marks this pivotal level:
A handful of sector ETFs had nice breakouts last week, so you could watch this group for possible long entry on a pullback to support. In no particular order, they include: StreetTRACKS Gold Trust (GLD), iShares Silver Trust (SLV), Utilities HOLDR (UTH), and StreetTRACKS Metal & Mining (XME). The iShares Software (IGV) attempted to break out above its pivot on February 22, but drifted back down into its range the following day. A firm rally above the February 22, 2006 high of $46.45 would confirm a breakout.
Unfortunately, it's the same old story for the broad market as we enter the new week. We continue to be faced with confused S&P and Dow indexes that are trying to go higher, but lack the necessary momentum to do so. But thanks to newfound strength in the Semis, the Nasdaq is acting much better and could prop up the other indices for a while. Trading ETFs that lack a direct correlation to the stock market, such as GLD and SLV, is a good way to minimize capital risk in an indecisive market environment. You may also consider positioning yourself on the long side with a strong Nasdaq ETF like SMH, while simultaneously being short a weak one like FXI.
Open ETF positions: We are currently flat (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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