More Specialty Etfs Marching Higher

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

The S&P 500 built on momentum from the previous day's breakout above its recent range, as the Dow ran into resistance of its 50-day moving average.  After an uneventful start, the major indices stealthily moved higher at mid-day, then drifted sideways throughout the afternoon. The S&P 500 climbed 0.7%, the Nasdaq Composite 0.8%, and the Dow Jones Industrial Average 0.9%.  The small-cap Russell 2000 and S&P Midcap 400 indices scored matching gains of 1.0%.  A pullback in the final hour pulled the broad market off its best levels of the day, but the main stock market indexes still finished in the upper third of their intraday ranges.

Total volume in the NYSE rose 4% above the previous day's level, enabling the S&P to score its second straight day of higher volume gains. DTurnover in the Nasdaq increased by 8%.  Despite the second consecutive "accumulation day" in the NYSE, trading in both exchanges still failed to move above average levels.  Market internals were solid.  In both exchanges, advancing volume exceeded declining volume by a margin of 5 to 2.

After several dips below its 50-day MA that failed to follow through to a steeper correction, the euro broke out to close at a new high to the U.S. dollar yesterday.  If the dollar continues to weaken, the easiest way to profit is through buying the CurrencyShares Euro Trust (FXE).  The CurrencyShares family of ETFs enable investors and traders an effective way to trade currencies with the same simplicity of exchange traded funds.  Each of the eight different ETFs in the family are tied to the direction of the U.S. dollar, in relation to various currencies around the world.  FXE is one of the most popular because it tracks the price of the euro.  Yesterday's breakout in FXE is shown on the daily chart below:

After the third failed attempt to move above the $149.50 level (roughly equivalent to an exchange of $1.495 dollar/$1 euro), a short sale made sense when FXE broke down below both its 50-day MA and prior "swing low" on February 7.  Nevertheless, three technical reasons to be intermediate-term bearish on the euro (bullish on the dollar) didn't matter.  Incessant weakness in the dollar caused the euro (and FXE) to move right back to a new high just a few weeks later.  With FXE now lacking overhead resistance and sitting at a new high, one could buy FXE with a stop just below the $149.50 breakout level.  To give a little more wiggle room, a stop below yesterday's low would be okay too.  However, an inability to hold yesterday's low would represent a failed breakout to a new high. When those happen, it's of paramount importance to get out quickly!

Fueled by a jump above the $100 mark for a barrel of crude oil, the U.S. Oil Fund (USO) is the latest commodity-based ETF to break out to a new high.  Comprised of a staggered series of crude oil futures contracts, USO roughly, but not exactly, mimics the price of crude oil.  Prior to yesterday's breakout, USO consolidated in a tight, sideways range throughout last week.  When crude surged to a new high yesterday, USO moved above resistance of its prior high from January:

Over the past several days, we've pointed out various ETFs that have broken out to new highs.  However, don't be fooled into thinking this is indicative of underlying stock market strength because most of them are specialty ETFs such as commodities or currencies.  Nevertheless, the beauty of relative strength trading with ETFs is that the constant rotation of institutional funds always causes one or two groups of ETFs to trade independently of the main stock market indexes.  Our job is simply to find the positive money flow, then ride along on the coattails of mutual funds, hedge funds, and other institutions.  That's why we continually point out ETFs with the most relative strength in this daily commentary.

In yesterday's Wagner Daily, we illustrated how the S&P 500 was approaching resistance of its 50-day MA, as well as its prior "swing high" from February 1.  Though it fell shy of its 50-day MA yesterday, the blue chip Dow actually touched and closed right at its 50-day MA.  The Nasdaq Composite finally moved just a few points above its 20-day EMA, but is still stuck in its recent range and lagging behind the S&P and Dow.  The Nasdaq's 50-day MA is still well above its current price.  Overall, yesterday's gains failed to significantly change the technical chart patterns of the major indices. Only if the major indices begin rallying above their 50-day MAs and prior highs from February 1 will we become more confident about the long side of the market.

Aside from the relative strength and divergent patterns in a few specialty ETFs, we're not enthused about being heavily positioned anything other than cash right now. Because of overhead resistance of the 50-day moving averages, we still believe overall odds favor the short side of the market more than the long side.  However, blindly entering short positions into strength can be quite dangerous. Rather, we'll continue stalking the market for short entries, but we'll probably hold off until we see clear signs the buying interest has dried up.  If the major indices convincingly break out above their 50-day MAs, our bias will shift more to the long side of the market. But because of the market's mixed technical picture, a mostly cash position makes sense right now.

Open ETF positions:


Long - IYM

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.

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