The Wagner Daily ETF Report For February 4
After bouncing off their recent lows with two consecutive days of robust gains, stocks took a breather yesterday. The S&P 500 and Dow Jones Industrial Average oscillated within their previous day's trading ranges before finishing lower by 0.6% and 0.3% respectively. Faring better, the Nasdaq brothers played "catch up" with the rest of the major indices, which they had lagged behind earlier the week. The Nasdaq Composite showed relative strength by eking out a gain of less than 0.1%; the large cap, tech-dominated Nasdaq 100 Index rose 0.4%. Conversely, small and mid-cap stocks showed the most weakness. The Russell 2000 slid 0.6% and the S&P Midcap 400 lost 0.7%.
Total volume in the NYSE eased 10%, while volume in the Nasdaq decreased 7% below the previous day's level. While lighter volume on an "up" day would have been discouraging, the slower trade during yesterday's consolidation day was positive because it indicates institutions were not immediately selling into strength of the preceding two days' gains. As long as turnover remains lighter while stocks trade sideways to lower, but ticks higher when the major indices stage their next rally attempt, the price to volume relationship of the broad market would be considered bullish.
In yesterday's commentary, we pointed out two potential ETF trade setups, one bullish and one bearish, and suggested traders may want to be lightly positioned on both sides of the market right now. When the session opened, we followed through with our pre-market analysis by adding both S&P Biotech SPDR (XBI) and UltraShort Real Estate ProShares (SRS) to our portfolio. Fortunately, market conditions enabled us to enter both positions at our originally anticipated prices. With XBI, we were looking for a pullback to near the area of the preceding day's breakout level. A little more than an hour after yesterday's open, that ideal entry point was provided to us. On the daily chart below, notice how yesterday's low in XBI nearly perfectly coincided with new support of the breakout above the September 2009 high:
When looking for a more precise entry point than a daily chart can provide, we frequently drill down to the 15-minute, intraday timeframe. When a stock or ETF convincingly breaks out on strong volume, as XBI did on Tuesday, the first subsequent touch of the 20-period exponential moving average on the 15-minute chart (20ema/15 min) often provides a secondary buy point for traders who did not buy the initial breakout. On the 15-minute chart below, notice how XBI merely "undercut" its 20ema/15 min by a few cents, then reversed higher throughout the rest of the day. It was during that "undercut," at $56.90, that we bought XBI. Conveniently, the 20ema/15 min converged with support of the daily breakout level, shown on the chart above. Below, the 15-minute chart of XBI details its intraday price action:
As for our bearish position in SRS, we simply bought it at market, five minutes after the open. Recall we illustrated how iShares Real Estate Index Trust (IYR) had already bumped into substantial resistance of its 50-day moving average, as well as its prior price consolidation, in Tuesday's session. As such, we were already provided with an ideal entry point to sell short the real estate sector. We bought the inversely correlated "short ETF" (SRS), just a few cents higher than the previous day's closing price.
Yesterday, we said, " In the past, we've found it quite possible to simultaneously profit from both long and short positions, particularly when the broad market is indecisive or in transition." Since both XBI and SRS closed with an unrealized gain, we're off to a good start with those two trades. In addition, we remain long U.S. Dollar Bull Index (UUP), iShares Japan Index (EWJ), and First Trust Natural Gas (FCG). Of those three, UUP is acting the best, as it consolidates near its recent, five-month highs. EWJ and FCG, both of which we're positioned with only half our normal share size, are bouncing off their "swing lows," but upside momentum has not been very strong. As such, we're trailing the stop higher in both positions, just to minimize risk in case the broad market suddenly turns lower again.
As for the broad market, the February 2 highs have become very short-term resistance levels to watch. Beyond that, there's much more notable resistance at the 20 and 50-day moving averages of the major indices. Although most of the main stock market indexes posted losses yesterday, a bit of a pullback during a fledgling rally attempt is to be expected, especially a retracement on lighter volume. Therefore, there's nothing to indicate the bounce off the January lows is finished. Stocks could easily meander sideways for another day or two, then embark on making another leg higher. Whether or not the gains of another wave up would be sustainable is too early to determine, but it may be dangerous to start getting aggressive on the short side right now. If the broad market is destined to head lower in the intermediate-term, it wouldn't surprise us to see a bit more of a "short squeeze" before it does. Nevertheless, we advocate hedging your risk by keeping at least one or two short positions in your portfolio right now.
Open ETF positions:
Long - UUP, XBI, FCG, EWJ Short (including inversely correlated "short ETFs") - SRS
Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and MorpheusTrading.com, a trader education firm.
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