Coal ETF on fire, joining the blazing hot Solar ETFs

The main stock market indexes followed up Monday's strong session with a modest, broad-based pullback, but an extremely narrow trading range showed a lack of decisiveness in either direction. Stocks drifted lower in the morning, moved in a tight, sideways range throughout most of the day, then ticked higher to minimize their losses into the close. The S&P 500, which finished 0.4% lower, traded in an intraday range of just ten points -- its tightest session so far this year. The Dow Jones Industrial Average eased 0.2% and the Nasdaq Composite declined 0.5%. Both the small-cap Russell 2000 and S&P Midcap 400 indices fell 0.8%. The major indices settled between the middle to upper quarter of their intraday ranges.

Total volume in the NYSE declined 6%, while Nasdaq volume was on par with the previous day's level. The lighter turnover enabled the S&P and Nasdaq to avert a bearish "distribution day." However, it's notable that volume was tracking susbstantially higher throughout most of the day, especially during the morning decline. Turnover only eased during the rally off the lows that occurred during the final hour of trading. As such, it would be deceiving to say there were no signs of institutional selling yesterday. In both the NYSE and Nasdaq, advancing volume very marginally exceeded declining volume.

In yesterday morning's commentary, we looked at several ETFs we're stalking for possible buy entry on a pullback. Specifically, we pointed out the solar energy and several emerging markets ETFs as strong pullback buy candidates. Joining our watchlist of ETFs is Market Vectors Coal (KOL), which recently broke out on strong volume. Take a look:

As we always view volume spikes as signs of institutional buying interest, one thing that initially attracted our attention to KOL was the recent buying interest, denoted by the volume surge in recent days. When KOL broke out on May 1, it did so on nearly double its average daily volume. The following day, trading in KOL jumped to more than four times its average daily volume, clearly pointing to accumulation by mutual funds, hedge funds, and other institutions. As it should on a pullback, volume retreated slightly yesterday, but KOL still remained quite active. Over the next few days, we ideally would like to see KOL gently retrace on declining volume, forming a "bull flag" type chart pattern. If it does, we'll be looking to buy the first subsequent rally above the upper channel of the hourly downtrend line that develops, especially if volume returns on the next breakout.

Yesterday's lack of broad-based direction was likely attributed to nervousness ahead of Thursday's public release of the results of the financial "stress tests" conducted by the government last week. Tomorrow, we will learn of the current liquidity status of nineteen of the largest U.S. banks, and whether or not they will require more TARP "rescue" funds from the Fed. Obviously, the reaction to those results will have a large impact on the direction of the financial sector, as well as the entire broad market. We continue to look for buy entries in strongly trending ETFs that pull back to support, but we're not in a hurry to enter new positions ahead of tomorrow's eagerly anticipated news.

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Open ETF positions:

Long - SLV, FXY
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 Trade Alerts are also sent via e-mail and/or mobile phone text message on as-needed basis.

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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's new book, Trading ETFs: Gaining An Edge With Technical Analysis, was published by Bloomberg Press in August, 2008. Wagner also 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 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.