Nice Pullback In The Gold ETFs

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

Stocks concluded last Friday's session with moderate gains, but the day's action was uneventful overall. The major indices gapped higher on the open, chopped around in a range throughout the day, then settled in the upper third of their intraday ranges. The Nasdaq Composite gained 0.7%, while both the S&P 500 and Dow Jones Industrial Average advanced 0.5%. Bearish divergence was seen in small and mid-caps. The Russell 2000 lost 0.3% and the S&P Midcap 400 slipped 0.2%. For the week, the S&P 500 edged 0.3% higher, but is still 6.6% off its October high. For the year, the benchmark index is showing a gain of 2.8%.

Total volume edged 1% higher in the Nasdaq, as volume in the NYSE increased 9% over the previous day's level. Given the bearish sentiment in the market, a day of higher volume gains would normally have been a positive sign of institutional accumulation. However, the modest increase in turnover was likely attributed to last Friday being an options expiration day. Trading activity typically rises on the third Friday of every month, as investors jockey their stock positions ahead of monthly options expiration. Market internals also failed to confirm the gains in the main stock market indexes. Advancing volume in the Nasdaq exceeded declining volume by less than 3 to 2. The NYSE adv/dec volume ratio was slightly negative.

Last week, the spot gold commodity finally retraced a bit of its parabolic run, causing the StreetTRACKS Gold Trust (GLD) to correspondingly do the same. In each of the past two sessions, GLD has closed below its 20-day EMA, but the ETF is still several points above its 50-day MA. From here, we're waiting to see whether GLD pulls back more and touches its 50-day MA, or if perhaps it moves back above its newly formed hourly downtrend line. Similarly, the Market Vectors Gold Miners (GDX), which is tied to the price of a basket of individual gold mining stocks, has already retraced to its 50-day MA, but has held above it in each of the past two sessions. As with GLD, we want to see whether or not GDX intends to continue its strong uptrend. If it does, we will consider buying it on a rally above the downtrend line shown on the daily chart below:

For better price confirmation, one might consider waiting for a move back above the 20-day EMA, presently at 48.33, before buying GDX. This would help to confirm a real resumption of the uptrend and reduce the odds of merely getting sucked in by a "stop hunt" above the downtrend line. Although not shown, the pattern in GLD is similar to GDX, except that GLD remains several points above its 50-day MA. Before the correction off the highs, GLD was showing slight relative strength to GDX, but the opposite has been happening over the past several days.

One of best things about commodities ETFs such as GLD is that they are not directly correlated to the direction of the overall stock market. The uncorrelated chart patterns of specialty ETFs such as commodities, bonds, currencies, and even international ETFs make them the ideal trading vehicles in periods of indecision for the U.S. stock market. The CurrencyShares Euro Trust (FXE), which mirrors the spread of the Euro to the U.S. dollar, is another great example of an ETF that ignores the direction of the broad stock market. FXE is presently consolidating in a tight range, at its all-time high, possibly setting up for another leg higher. However, be aware that the weekly chart is getting a bit extended to the upside.

Outside of the specialty ETFs arena, we still like the relatively bullish patterns in the Biotech and Utilities sectors. Both sectors closed marginally higher last Friday, but have not yet triggered for the long entries we illustrated in last Friday's Wagner Daily. With either the DJ Utilities Average ($DJU) or the Amex Biotech Index ($BTK), a firm rally above last Friday's highs could trigger potential long entries in the corresponding ETFs with the most relative strength. Subscribers should note the trade details for our long setup in the iShares DJ Utilities Sector (IDU) below. On the short side, we still like the Oil Service Index ($OSX), which broke down firmly below its 50-day MA last week. We remain positioned long in the inversely correlated UltraShort Oil and Gas ProShares (DUG).

Last Friday's price action in the S&P 500 left the index "stuck between a rock and a hard place." With the intraday trading range contained within the prior day's range, it positions the S&P for further indecision going into today's session. On one hand, the S&P held the low of the November 13 rally, meaning the index could still be reversing to the upside. Conversely, however, the S&P has retraced nearly all of that day's gain and could be ready to resume its current downtrend to new lows. With the 200-day MA acting firmly as overhead resistance, odds would favor the second scenario, but we can't be too bearish on the short-term unless the S&P convincingly breaks down below last week's low. Approach the next several days with caution because we are also dealing with a holiday-shortened week. Expect volume to gradually dwindle leading up to the market's closure on Thursday for the Thanksgiving Day holiday. Friday is a shortened session that will close at 1:00 pm ET.

Open ETF positions:

Long - DUG

Short - XM


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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