New ETF setups for after the Fed meeting

Stocks kicked off the week with a lethargic session of broad-based losses yesterday, as traders moved to the sidelines ahead of today's Fed decision on interest rates and economic policy. The overall market drifted lower throughout most of the day, but a wave of buying in the last thirty minutes of trading halved the losses of the major indices. The Dow Jones Industrial Average slipped 0.8%, the S&P 500 1.3%, and the Nasdaq Composite 2.1%. The small-cap Russell 2000 and S&P Midcap 400 indices lost 3.4% and 2.6% respectively. The main stock market indexes settled just below the bottom half of their intraday trading ranges.

We concluded yesterday's commentary by saying "trading may be subdued until tomorrow afternoon's (December 16) Fed announcement on interest rates and economic policy." That was certainly the case, as turnover in the NYSE shriveled to its lightest level in more than three months. Total volume in the NYSE declined 17%, while volume in the Nasdaq decreased 13% below the previous day's level. When the market is dropping on such a slow pace of trading that is well below average levels, it only takes a minimal amount of buying pressure to reverse the losses. The market's ability to recoup half of its intraday losses in the final minutes of trading is a good example of how low volume moves in the market can reverse swiftly.

The daily chart pattern of the Retail HOLDR (RTH) is setting up for potential buy entry for a short-term swing trade. Since showing relative strength and breaking out above its 50-day MA on December 5, RTH has gently retraced down to support of its 20 and 50-day moving averages, which have converged together at the $72.50 area. This is shown below:

With this setup, we like a buy entry above yesterday's high of $74.94. Such a rally should enable recent bullish momentum to continue, as it would correlate to a breakout above the hourly downtrend line from the December 8 high. We would look for a short-term price target in the $82 to $85 area. A relatively tight stop could be placed below the December 12 low of $72.06.

iShares Nasdaq Biotech (IBB) is poised to break out above a base of consolidation and its 50-day moving average. If it does, a short-term buying opportunity could be created. The setup is illustrated on the daily chart of IBB below:

Notice how the high of the recent consolidation roughly converges with resistance of the 50-day MA, at the $67.30 to $67.60 area. As such, we like IBB for a swing trade buy entry above the $67.75 area, giving the trade a bit of "wiggle room" above resistance to help confirm its breakout. A realistic price target is resistance of the November 4 high, around the $74 level.

If you missed our initial buy entry into iShares Xinhua China 25 (FXI) on December 5, its current price provides a secondary buy point. This is explained on the daily chart of FXI below:

The dashed, horizontal line on the chart above marks support of the December 8 breakout level. FXI has retraced to the low of its short-term consolidation, which is just above that support level. The 10-day moving average (the dashed purple line) should also provide support near the current price of FXI. Overlaying the chart of the S&P 500 with FXI, one will clearly see the relative strength FXI has been exhibiting to the domestic market in recent weeks. As such, FXI is likely to outperform the major indices if stocks make another leg higher sometime this month.

Yesterday, many of the fixed-income (bond) ETFs broke out of short-term consolidation patterns to rally to new all-time highs. We're still stalking them for potential buy entry, but they need a substantial price correction at this point, such as a pullback to their 20-day exponential moving averages. Additionally, we're still monitoring the CurrencyShares Euro Trust (FXE) for a potential pullback to a buyable area of support. As we pointed out in last Friday's newsletter, a break of the U.S. dollar's primary uptrend line caused FXE to recently reverse its dominant downtrend by gapping sharply above its 50-day moving average.

On a technical level, yesterday's losses did not change the overall picture of the broad market. The intraday trading ranges of all the major indices were completely contained within the previous day's highs and lows, making it an "inside day." It was evident traders and investors were unwilling to make big bets on either side of the market ahead of today's announcement on economic policy by the Federal Open Market Committee (FOMC). At 2:15 pm ET, the FOMC is widely expected to announce a reduction of 50 basis points in the Fed Funds Rate. Thereafter, expect the usual post-Fed volatility and erratic market behavior that follows from the knee-jerk reaction.

Going into today, the December 12 lows are a key short-term support level. Closing prices below those levels could significantly alter the recent bullish sentiment of the overall market, as it would cause the main stock market indexes to slide below support of their prior intermediate-term downtrend lines they broke out above on December 8 (illustrated in the December 12 issue of The Wagner Daily). On the upside, pivotal resistance will obviously be found at the 50-day moving averages we've discussed extensively over the past week. Consider avoiding new trade entries until the S&P, Dow, and/or Nasdaq either close below their December 12 lows (leading to potential short entries), or above their 50-day moving averages (increasing the odds of further upside gains).

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Today's Watchlist:

Since it's a "Fed day" and we already have four open positions, we're not planning to enter any new ETF trades today. However, as per above, we're monitoring IBB and RTH for potential breakout entries, as well as TLT and FXE for pullback entries. If, by chance, the December 12 lows are violated, we'll begin looking to conservatively re-enter the short side of the market. If anything new is entered today, we'll promptly send an Intraday Trade Alert. Still, we'll probably wait to see the real reaction to the Fed announcement tomorrow.

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Open ETF positions:

Long - SMH, FXI, INP, QLD
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.