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Ishares China (fxi) Ready To Resume Its Downtrend
If you missed yesterday's trading session and only picked up a newspaper to see the closing gains in the broad market, you might reasonably have assumed it was just a normal bounce off of the previous day's losses. In reality, however, it was quite a wild day that kept both the bulls and bears on the edge of their seats. Pre-market news that the Fed was initiating measures to help banks with recent credit problems sparked a monstrous opening gap. The major averages each began the day about 2% higher, nearly wiping out the previous day's losses, but the excitement was short-lived. The bears immediately took control and sold into strength.
After trending lower throughout the entire session, the major averages had fallen all the way to negative territory in the final hour, but a sudden wave of buying in the final fifteen minutes of trading pushed stocks back into positive territory. After all the spastic price action, the Nasdaq Composite had gained 0.7%, the S&P 500 0.6%, and the Dow Jones Industrial Average 0.3%. The small-cap Russell 2000 and S&P Midcap 400 indices were higher by 0.7% and 0.3% respectively. All of the main stock market indexes settled just below the middle of their rather wide intraday trading ranges.
Total volume in the NYSE increased 12%, as the Nasdaq's volume ticked 3% above the previous day's level. Yesterday would have marked the second straight "distribution day" for both exchanges, but the last-minute rally enabled the major indexes to avoid that label. Still, considering that stocks moved steadily lower throughout the entire day until the last fifteen minutes, it is fair to say the session was marked by institutional selling. Despite the closing gains, advancing volume was roughly on par with declining volume in both the NYSE and Nasdaq.
In the December 10 issue of The Wagner Daily, we pointed out the potential trade setup in the iShares Xinhua China 25 Index (FXI). After rallying into key resistance of its 50-day MA, we suggested that a volatility expansion in either direction was likely to occur this week. On December 11, FXI got clobbered alongside of the U.S. stock market, but we normally avoid entering new positions on Fed days. Yesterday, FXI gapped higher on the open, but again sold off as the domestic markets dropped. When it bounced in the early afternoon, we sent an intraday e-mail alert to subscribers, informing of our decision to sell short FXI. It dropped four points about one hour later, but followed the S&P and Nasdaq to a recovery in the final fifteen minutes. The daily chart of FXI below shows last week's failed rally attempt above the 50-day MA.
Currently, the FXI trade is showing a small unrealized gain of half a point. However, weakness in the Shanghai market overnight will put pressure on FXI today. In the pre-market, it is already trading approximately seven points below yesterday's close. Our downside price target is a test of the November low, while our protective stop is just above the 50-day MA. As a side note, those with non-marginable cash accounts who cannot sell short may wish to consider buying the inversely correlated UltraShort ProShares Xinhua 25 Index (FXP) instead. This new ETF, launched last month, moves in the opposite direction of FXI, and at a leveraged ratio of 2 to 1. Thanks to the subscriber who brought this new ETF to our attention. The inversely correlated ProShares UltraShort family of ETFs certainly have become quite popular in the short time since their introduction last year.
Over the past several days, we have said the stock market would begin showing its real reaction to Tuesday's Fed meeting one to three days later. But if yesterday's erratic price action was any indication, the picture is quite foggy! After forming a long-wicked "doji star" candlestick, the S&P 500 closed yesterday right on its 200-day MA:
A "doji star" pattern forms when the market swings substantially on both sides of its opening price, but eventually closes at or near the level it opened. On a technical level, the pattern indicates that a tug-of-war took place throughout the day, but nobody won in the end. The length of the "wicks" or "tails" on both sides of the body of the candle indicates the amount of indecision that took place. The wide range of yesterday's "doji star" in the S&P 500 clearly shows the battle that took place. Curiously, the bulls and bears managed to close the S&P right on pivotal support/resistance of its 200-day MA, further fueling speculation by traders and investors.
Given yesterday's action, what can we really say about what to expect going into today's session? Until the whipsaw action settles down and the market begins to give clear signals again, your best bet is to remain positioned largely in cash. If trading at all, overall momentum favors the short side. Only a few sectors such as Oil and Pharmaceuticals are still holding near their highs, while most other sectors are rolling over again.
Open ETF positions:Long - PPH
Short - FXI
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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