Silver ETF pulling back to support

Stocks concluded the week with a tug-of-war between the bulls and bears that left the major indices near the flat line. The broad market initially gapped sharply higher on the open, but traders quickly sold into strength, causing the main stock market indexes to fall into negative territory one hour later. Stocks recovered later in the morning, only to drift back down in the afternoon. In the end, the market was little changed for the day. The Dow Jones Industrial Average eked out a gain of 0.1%, the Nasdaq Composite was unchanged, and the S&P 500 slipped 0.3%. The small-cap Russell 2000 and S&P Midcap 400 indices lost 0.2% and 0.1% respectively. The major indices closed just below the middle of their intraday ranges.

Total volume in both the NYSE and Nasdaq eased 6%, as turnover in the NYSE remained below its average pace for the sixteenth straight session. After the opening sell-off, trading was initially tracking much higher than the previous day's level, but turnover eased as the session progressed. Had volume remained at its rapid pace, last Friday's session would have been indicative of bearish "churning," which arises when institutions sell into strength near the highs.

Last week, we pointed out the bullish pattern in iPath Copper Trust (JJC), which was trading in a tight, sideways range, after breaking out of a symmetrical triangle pattern. A related ETF that appears to be showing even more relative strength is PowerShares Base Metals (DBB), whose portfolio is comprised of a mixture of aluminum, copper, and zinc. Its daily chart is shown below:

Since breaking out above its 200-day moving average on June 1, DBB has been consolidating near a pivotal level of horizontal price resistance. On June 4, DBB closed above its previous "swing high" from May 7, but drifted back below it the following day. Going into this week, we like DBB for long entry on a confirmed breakout above the June 4 high, over the $15.50 area. A protective stop can neatly be placed below the 200-day moving average.

Today, you may want to set a price alert for potential buy entry into iShares Silver Trust (SLV). Last Friday, precious metals corrected from their recent highs, causing SPDR Gold Trust (GLD) to lose 2.6% and SLV to fall 4.0%. Today, in pre-market trading, futures contracts on the shiny metals are also trading substantially lower. If the pre-market weakness persists into the open, SLV and GLD should open near support of their 20-day exponential moving averages (EMAs), thereby creating an ideal buy entry. But between the two ETFs, we still believe SLV is a better play than GLD due to its relative strength. On the daily charts below, notice how SLV will merely be pulling back to support of its February 2009 high, but GLD never even made it above its February 2009 high in the first place:

When/if SLV touches its 20-day EMA, it will be the first time it has done so since breaking out at the beginning of May 2009. As such, a pullback to that level represents a buy entry with a positive reward/risk ratio. Since we sold our SLV position last week, within a few cents of its high, a re-entry on the pullback will enable us to get back into SLV at a price 7 to 10% lower than where we sold into strength. On the next move up, we're looking for SLV to break out above its long-term weekly downtrend line from the March 2008 high.

CurrencyShares Japanese Yen (FXY) sliced through key support of both its 50 and 200-day moving averages last Friday, causing the position to hit our stop. Due to a lack of bullish follow-through from the previous day's strength, we also made a judgment call to scratch our position in the Bank SPDR (KBE). As such, we're now flat.

In last Friday's commentary, we said we're in "pullback buying" mode, and listed several ETFs on our watchlist for potential entry on a correction. Since the main stock market indexes finished near the flat line on lighter volume last Friday, the session was primarily a non-event. Therefore, our plan remains the same going into today. ETFs we're stalking for potential buy entry on pullbacks to their respective support levels include: iPath India (INP), iShares Xinhua China 25 (FXI), and iShares Silver Trust (SLV; as detailed above). If it triggers, PowerShares Base Metals (DBB) is, of course, a breakout entry.

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Open ETF positions:

Long - (none)
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.