Energy ETFs ignore broad-based pullback

Stocks took a well-deserved breather from last week's gains yesterday, as the major indices consolidated near their previous day's highs before closing modestly lower. The Nasdaq Composite dipped 0.3%, the S&P 500 0.5%, and the Dow Jones Industrial Average 0.9%. Small caps showed relative strength, enabling the Russell 2000 to finish unchanged. The S&P Midcap 400 eased just 0.2%. Stocks drifted into the close, causing the main stock market indexes to settle near the middle of their intraday trading ranges.

Traders started returning to their desks after the holidays, enabling volume levels to begin creeping back to life. Total volume in the NYSE rose 27% above the previous day's level, while volume in the Nasdaq similarly increased 20%. The broad-based losses on higher volume technically caused both the S&P 500 and Nasdaq Composite to register a bearish "distribution day." However, turnover still remained well below 50-day average levels. We believe the stock market's modest losses on higher volume were more the result of traders simply getting back to work, rather than confirmed institutional selling into strength. Since many leading stocks and industry sectors ignored the market's weakness and surged higher yesterday, overall price action in the broad market was also more indicative of bullish consolidation than bearish "churning."

Over the past two days, bonds have corrected sharply. To illustrate this, check out the daily chart of iShares 20+ year T-bond Fund (TLT), a popular ETF proxy for the fixed-income markets:

Throughout the last two weeks of December, TLT was consolidating at its all-time high, around the $120-$122 area. If TLT would have followed through and broken out to make another leg up, it would have pointed to continued reluctance of the "smart money" to rotate funds back into the equity markets. But instead, TLT has begun to sell off sharply over the past two days, slicing through the 20-day exponential moving average (EMA) without even a bounce. We view this is a positive sign of institutional sector rotation out of the fixed-income markets and back into the equities markets. In the coming weeks, consider monitoring the price action of TLT as a broad indicator of overall money flow into the stock market. As long as TLT remains in correction mode, the stock market's price action is likely to remain healthy.

In yesterday's Wagner Daily, we discussed the bullish reversals that were starting to occur in the commodity ETFs. Though SPDR Gold Trust (GLD) closed lower yesterday, U.S Oil Fund (USO) scored its third straight day of gains, and is now showing an unrealized gain of more than 3 points (9%) since our January 2 buy entry. The recent strength in crude oil also enabled the Oil Service HOLDR (OIH) to ignore broad market weakness and zoom 4% higher yesterday. Notice that OIH closed above its 50-day moving average for the first time in six months, indicating a potential reversal of its intermediate-term trend:

As the broad market drifted sideways, several other energy-related ETFs registered solid gains on bullish reversal patterns. Market Vectors Coal ETF (KOL) broke out above its 50-day MA on January 2, then rallied above resistance of its mid-December "swing high" yesterday. Below is the daily chart of KOL, which may be entering into a new intermediate-term uptrend as well:

Last week, we pointed out the bullish setup in another energy ETF, Claymore Global Solar Energy (TAN). Since then, TAN has shone brightly, breaking out above its 50-day MA and surging more than 18% over the past week. Take a look:

Because we already had five open ETF positions at the time, we passed on "officially" buying TAN in our model portfolio when it broke out last week. Nevertheless, we sent an Intraday Trade Alert to subscribers on the day of the breakout, giving a courtesy heads-up to the buying opportunity. If you bought TAN on that alert, continue trailing a relatively tight stop to maximize your gain while protecting profits. For trades of this nature, we like to trail a stop just below support of the 20-period exponential moving average (EMA) on the hourly chart. Presently, the 20-EMA/60 min. is at the $9.17 level. If you missed the original breakout entry into TAN and would like to take advantage of its relative strength, a pullback to just above the 50-day MA, around $8.50 - $8.60 is a low-risk pullback entry.

We concluded yesterday's market commentary by saying, "After three straight days of solid gains, the S&P 500 could easily pull back in the coming days. However, both the mid-December breakout level (919 area) and the 50-day MA (887 area) should act as support on any retracement. Unless both of those key short-term term support levels are broken, we view a pullback as a buying opportunity in the market, not the time to sell short." A pullback to support is indeed what happened, as yesterday's low in the S&P 500 was 919, right at new support of the mid-December highs.

In the very short-term, another day or two of consolidation or small losses on light volume would actually be healthy for the overall market, as it would allow the 20-period EMAs on the hourly charts to rise up and provide a bit of support to last week's gains. With leading individual stocks and sectors breaking out while the market moves sideways (such as the energy ETFs yesterday), we must say the broad market has yet to show any signs of heading back down in the near-term. Nevertheless, astute traders will keep the long-term downtrends in the back of their minds, as it will help them to remain alert and respectful of risk on the long side.

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Open ETF positions:

Long - FXI, INP, SLV, GDX, USO
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.