Precious metals ETFs at "make it or break it" levels

Last Friday's session was marked by divergence, as tech stocks logged substantial gains, but blue chips lagged behind. After opening slightly higher, the major indices drifted lower throughout most of the session, then bounced off their lows in the final ninety minutes of trading. The Nasdaq Composite gained 1.1%, but the Dow Jones Industrial Average slipped 0.2%. The benchmark S&P 500 was higher by 0.3%. The small-cap Russell 2000 and S&P Midcap 400 indices advanced 0.6% and 0.5% respectively. The main stock market indexes finished at, or just below, the middle of their intraday ranges. All the broad-based indices registered losses for the week. The Nasdaq fell 1.6%, the S&P 500 2.6%, and the Dow Jones Industrial Average 2.9%.

Turnover surged higher across the board, though most of the faster pace was likely attributed to "quadruple witching" options expiration. Total volume in the NYSE spiked 91% above the previous day's level, while volume in the Nasdaq increased 34%. Technically, both the S&P and Nasdaq scored an "accumulation day" by rallying on higher volume. However, given that volume levels on "quadruple witching" days are typically inflated, it would be deceiving to label last Friday's session as definitively marked by institutional buying. Nevertheless, trading in the NYSE rose above its 50-day average level for the first time in more than a month. Market internals were positive, but only by a narrow margin. In both the NYSE and Nasdaq, advancing volume exceeded declining volume by a ratio of just over 2 to 1.

This week, we'll be keeping a close eye on the performance of the gold and silver ETFs. Last week was the third week of a pullback in the precious metals, but they're now poised to resume their dominant uptrends. Let's start by looking at the daily chart of SPDR Gold Trust (GLD), which tracks the price of the spot gold commodity (at 1/10 the price of an ounce of gold):

GLD traded in a tight, sideways range throughout last week, finishing just 0.3% lower. Presently, key support of the rising 50-day moving average is just below the current price of GLD, which is approaching resistance of the short-term downtrend line (the dotted blue line). Soon, GLD will be forced to "show its hand." Within the next few days, one possibility is GLD will break support of last week's lows and its 50-day MA, leading to another leg lower. But a more likely possibility is GLD will resume its dominant uptrend by breaking out above its short-term downtrend line, which converges with resistance of its 20-day exponential moving average (EMA). Since basic technical analysis states a longer-term trend has more precedence and importance than a shorter-term trend, the odds generally favor the next move being to the upside. Let's take a look at the daily chart of iShares Silver Trust (SLV):

Overall, the chart of SLV is similar to GLD. Both have been in "correction mode" for the past three weeks, and SLV traded in a narrow, sideways range last week. As with GLD, support of the 50-day MA is still below the current price of SLV. However, the 50-day MA now converges with support of the uptrend line from the April 2009 low (the ascending blue line). Conversely, GLD is already slightly below that uptrend line, but still above the 50-MA. Because the correction in SLV has been slightly steeper than the retracement in GLD, SLV is further away from its short-term downtrend line off the June high, as well as its 20-day EMA. But since their uptrends off the April 2009 lows began, SLV has shown a bit of relative strength to GLD.

If you're not presently positioned in GLD or SLV, these ETFs may present a nice swing trading opportunity sometime this week. A breakout above their short-term downtrend lines and 20-day EMAs would present an ideal buy entry, while a breakdown below the 50-day MAs would provide the chance to sell short and profit from momentum of a quick, downward move. We're still long SLV, which we bought two weeks ago, on the initial test of the 20-day EMA, but our protective stop is in the right place (just below the 50-day MA).

In the June 19 issue of The Wagner Daily, we illustrated how the S&P 500 had bounced off support of its 200-day MA. Since the index only marginally moved higher on Friday, the technical picture hasn't really changed since our last update. The S&P 500 closed right at resistance of its 20-day EMA, while support of the 200-day MA is below. So far, the S&P has retraced about one-third of its loss from the June 11 high, down to the June 17 low. Unless the index retraces more than two-thirds (or a 61.8% Fibonacci retracement) of its recent pullback, we must be very cautious with new long entries, especially considering the S&P and Nasdaq just suffered three bearish "distribution days." Markets at pivotal support/resistance levels can be very whippy and indecisive, so it may be a good idea to reduce your share size on any new positions taken in the coming week.

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Open ETF positions:

Long - IBB, SLV, UNG, SRS, INP, DBA
Short - (none, but SRS 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.