Oil ETFs bounce off support

Stocks snapped back from last week's losses, enabling the Nasdaq to zoom back above its 200-day moving average, but volume dwindled to its slowest pace in weeks. After gapping higher on the open, and subsequently showing early weakness, the main stock market indexes settled into a steady uptrend that persisted throughout the day. The Nasdaq Composite jumped 3.1%, the S&P 500 3.0%, and the Dow Jones Industrial Average 2.9%. The small-cap Russell 2000 advanced 4.0%, as the S&P Midcap 400 motored to a 3.8% gain. All the major indices closed at their intraday highs.

One key ingredient missing from yesterday's broad-based rally was volume. In both the NYSE and Nasdaq, turnover was 4% lighter than the previous day's levels. In the Nasdaq, it was the fourth straight day of declining volume, as well as the slowest session of trading in more than a month. Considering the large percentage gains of the major indices, one might have expected an accompanying volume surge as well, but mutual funds, hedge funds, and other institutions remained on the sidelines. Because the stock market entered into correction mode only last week, any rally that occurs on lighter volume must be viewed with a bit of skepticism.

Last week, we discussed several sectors and ETFs with relative strength we were monitoring for potential buy entry if they pulled back to key support levels. One of those was Claymore Global Solar Energy (TAN), which we bought when it came into support of its intermediate-term uptrend line and prior breakout level on May 13. The Oil sector, another industry on our watchlist, gave us an entry point yesterday. Both the Oil Index ($XOI) and Oil Service Index ($OSX) came into support of their 20-day exponential moving averages and multi-month uptrend lines last Friday. Yesterday, the sector indexes responded to their support levels by gaining an average of more than 4%.

Upon scanning the various oil-related ETFs, we noted iShares Oil and Gas (IEO) has been showing the most relative strength of the bunch. As such, we bought IEO yesterday, when it confirmed its pullback to support by subsequently rallying above resistance of its hourly downtrend line. The daily chart below illustrates the pullback to support. The hourly chart that follows shows our entry point on the hourly downtrend line break:

Another ETF on our potential buy watchlist was iPath India Index (INP). After consolidating in a tight range for the past two weeks, above support of its 200-day moving average, INP closed the previous session right at the upper end of its recent range. This caused us to set an alert for potential buy entry yesterday. However, the trade setup became invalidated because a positive response to news of India's government elections caused INP to gap open more than 25% higher yesterday! This is shown on the daily chart below:

With such a huge, one-day gain, INP could easily require two to five weeks (or more) to build a base of support that enables it to move higher. However, we'll still keep an eye on INP, just in case it forms a "bull flag" pattern that could send it another leg higher in the short-term.

Market Vectors Agribusiness (MOO), which we thoroughly discussed in yesterday's newsletter, continued building on its recent gains, and also moved above last week's high. However, because the broad market may still be in correction mode, we prefer "pullback" buy entries right now, rather than "breakout" buy entries. That's why we bought IEO yesterday, rather than MOO. Nevertheless, we still plan to grab some MOO on a pullback, preferably to the area of its 20-day EMA support.

In yesterday's closing commentary, we said, "The Nasdaq Composite remains below its 200-day moving average, but not by a wide enough margin that one strong day of gains couldn't push it back above. The S&P 500 and Dow Jones Industrial Average are sitting right on support of their 20-day exponential moving averages, which they have been glued to for the past three days." Indeed, one strong day of gains has pushed the Nasdaq back above its 200-day moving average, while both the S&P 500 and Dow Jones Industrials bounced off support of their 20-day exponential moving averages. Still, yesterday's overly light volume gives us cause for concern, as does the considerable amount of overhead supply that remains from the pullback of the past two weeks. Overall, stay alert, and be prepared to close positions on the wrong side of the market if stocks suddenly confirm a strong move in either direction.

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Open ETF positions:

Long - SLV, UNG, TAN, FXY, IEO
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.