Energy ETFs retrace down to support

Stocks bounced back to recover a portion of the previous day's losses yesterday, but the Nasdaq remained below both its 20 and 200-day moving averages. The main stock market indexes opened nearly flat, then drifted higher throughout the day. The Nasdaq Composite advanced 1.5%, the S&P 500 1.0%, and the Dow Jones Industrial Average 0.6%. The small-cap Russell 2000 and S&P Midcap 400 indices closed higher by 1.8% and 1.6% respectively. Selling in the final hour caused the major indices to finish near the upper third of their intraday ranges.

Trading eased across the board, preventing the S&P and Nasdaq from rebounding on higher volume. Total volume in the NYSE declined 14%, while volume in the Nasdaq was 8% lighter than the previous day's level. Turnover in both exchanges limped in below 50-day average levels. Nasdaq volume was the lightest since May 1. In the NYSE and Nasdaq, advancing volume exceeded declining volume by a margin of approximately 7 to 2.

Yesterday, many of the energy-related ETFs gapped down to support of their 20-day exponential moving averages (EMAs), then reversed to finish higher. We've been waiting for pullbacks to support of the prior breakouts in this sector, and that came yesterday. Of all the oil and gas ETFs, Oil Service HOLDR (OIH) has been showing the most relative strength. Take a look at its daily chart below:

OIH began pulling back after running into resistance of its 200-day MA last week. However, now that it's come into support of its 20-day EMA, expect OIH to attempt a resumption of the multi-month uptrend. The prior breakout (as annotated by the dashed horizontal line) should also act as support. If you didn't buy yesterday's opening gap down to the 20-day EMA, an alternate entry point is a rally above the hourly downtrend line. This is shown on the shorter-term hourly chart below:

Yesterday's broad-based bounce was likely attributed to both the Dow and S&P coming into support of their 20-day EMAs. As it often does in steadily trending markets, the 20-day EMA has perfectly acted as support on numerous occasions since the uptrend off the March 2009 lows began. This is illustrated on the daily charts of both the Dow Jones Industrial Average and S&P 500 below:

Although it's positive these indexes once again bounced off their 20-day EMAs, the Nasdaq remains below its 20-day EMA, which it fell below the previous day. Prior support of the 20-day EMA in the Nasdaq has now become resistance, at least in the short-term. Above that, the 200-day moving average is obviously much more substantial resistance. This is likely to put pressure on the broad market today, which could easily cause the S&P and Dow to break support of their 20-day EMAs as well. If the S&P and Dow close below their 20-day EMAs, be prepared for a high-momentum wave of selling in the short-term. As we've been saying, a pullback to the 50-day MAs of the major indices would be a realistic downside target, and would also be positive for the health of the broad market. But because of monthly options expiration, be prepared for a choppy session today, especially in the afternoon.

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Open ETF positions:

Long - SLV, FXY, QID, TAN, UNG
Short - (none, but QID is an inversely correlated ETF)

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.