Ready To Capitalize On Further Strength In The U.s. Dollar

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

Stocks began the week on a positive note by shaking off early weakness and finishing moderately higher yesterday.  The major indices drifted lower in the first hour of trading, reversed to trend higher throughout mid-day, then oscillated in a tight, sideways range throughout the afternoon.  The Nasdaq gained 0.7%, the S&P 500 0.6%, and the Dow Jones Industrial Average 0.5%.  Small caps showed relative weakness, holding the Russell 2000 to a nominal 0.1% gain.  The S&P Midcap 400 rallied 0.6%.  The main stock market indexes finished in the upper third of their intraday ranges.

Unfortunately for the bulls, the punch of institutional accumulation was lacking yesterday.  Total volume in the NYSE declined 1%, as volume in the Nasdaq similarly ticked 6% lower.  Higher volume gains are rare in a bear market, so it wasn't surprising that turnover backed off a bit yesterday.  Market internals were also pretty lame.  In both exchanges, advancing volume exceeded declining volume by a margin of just 3 to 2.

Both of our open positions, the DB Commodity Index Fund (DBC) and the U.S. Natural Gas Fund (UNG), followed up on last Friday's breakouts with further gains yesterday.  DBC advanced modestly, but enough to set another fresh all-time high.  UNG zoomed 3% higher, gapping up above its prior high from last month.  Most importantly, volume in both ETFs continued to swell, and rose to approximately double the average levels.  Clearly, institutions have a healthy appetite for commodities right now.  As our unrealized gains in DBC and UNG continue to grow, we will trail our stops higher to protect the profit and maximize gains.

Commodities and other ETFs with no correlation to the stock market continue to offer the lowest risk investment on the long side of the market right now.  However, we've been noticing solid relative strength in the S&P Metals and Mining SPDR (XME) over the past several days.  The sector is also one of the few trading near its 52-week high.  Further strength in the broad market should push XME to a tradeable new high.  Because of its relative strength, XME should fare much better than other industry sectors if weakness in the broad market returns.  The XME daily chart is shown below:

On the short side, keep an eye on the CurrencyShares Euro Trust (FXE).  Since gapping down below support of its 50-day MA last week, FXE has shown no signs of attempted recovery.  If it falls below the low of its three-day bearish consolidation, it will represent a valid short sale entry.  Be aware, however, that FXE frequently has large opening gaps because of 24-hour currency trading that moves the value of the dollar.  The bearish pattern on FXE is illustrated below.  Regular subscribers of The Wagner Daily should note our detailed trigger, stop, and target prices in "Today's Watchlist" as well:

For the second day in a row, the S&P 500 traded within the previous day's intraday range.  The S&P has also moved in a narrow, horizontal range for the past four sessions.  On a technical level, this doesn't mean much except that buying and selling pressure has roughly been in parity for nearly a week.  The longer this short-term trading range continues, the more powerful the eventual move out of the range will be. Therefore, we suggest setting price alerts on your trading platform to immediately notify you of a move out of the near-term range.  The support and resistance levels of this recent range are shown on the hourly chart of the S&P 500 below:

With the index roughly sitting at a 50% Fibonacci retracement from its January 23 low to February 1 high, it's difficult to predict which direction the high-momentum move out of the range will go. As such, we have a neutral bias on the near-term direction of the overall market until the recent range in the S&P 500 is broken.  At that time, we will consider new trade entries in the broad-based ETFs.  Regardless of which direction the S&P resolves itself short-term, the broad market obviously remains in both intermediate and long-term downtrends. Don't forget the trends of longer time intervals typically hold more bearing and weight than the shorter-term trends.  Further, be aware that a breakdown below the short-term range will likely lead to the S&P 500 setting a new 52-week closing low.

Open ETF positions:






Long - DBC, UNG





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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