Pulling back after last week's rally, stocks sold off sharply yesterday. The major indices moved lower in the first thirty minutes of trading, then merely oscillated in a tight, sideways range throughout the rest of the day. The Dow Jones Industrial Average finished 1.0% lower, as both the S&P 500 and Nasdaq Composite lost 1.1%. Completely erasing the previous day's 1.7% advance and then some, the small-cap Russell 2000 fell 2.2%. The S&P Midcap 400 shed 1.5%. All the main stock market indexes closed near their intraday lows.

Despite the passing of the holiday weekend, volume in the NYSE was 12% lighter than the prior day's level. However, turnover in the Nasdaq ticked 2% higher. This caused the Nasdaq Composite to register a bearish "distribution day," indicative of instituitonal selling. In the NYSE, declining volume exceeded advancing volume by a margin of 5 to 1. The Nasdaq adv/dec volume ratio was more moderate, at negative 2 to 1.

In recent weeks, we've been discussing the impressive relative strength various international ETFs have been exhibiting to the U.S. markets, most of which are emerging markets ETFs. Along with the increased appetite for exposure to equities in emerging markets, institutions have also been hot on emerging markets debt exposure. The iShares Emerging Markets Bond Fund (EMB), for example, trended very steadily higher throughout July and August. As it was doing so, we put it on our radar screen to monitor for potential buy entry on a correction. Now, it has finally retraced from the high of its impressive run, and may soon provide us with a low-risk pullback entry point. The daily chart of EMB is shown below:



Presently, the 20-day exponential moving average (the beige line) is providing solid support during this retracement off the high. Notice this is the first touch of the 20-day EMA since the early July breakout that kicked off a solid uptrend. As explained in my book, Trading ETFs: Gaining An Edge With Technical Analysis, the first retracemet to the 20-day EMA of a strongly trending ETF usually becomes a great secondary entry point if the initial breakout was not bought. Often, the first touch of the 20-day EMA is the only chance traders get to participate in the next leg of the trend, in this case another leg higher. The stronger the trend before the retracement to the 20-day EMA, the better the change of the trend resuming shortly thereafter. In this case, we like EMB for buy entry above the September 3 high of $110.29. A rally above the high of the past week should lead to another round of new highs in EMB. As a bonus, EMB has also been paying monthly dividends of approximately 45 cents per share.

The U.S. Dollar Bull Index (UUP) is poised to break out above resistance of its intermediate-term downtrend line, as well as its 50-day MA. If it does, UUP could see a resumption of the dominant uptrend off the December 2009 lows. The setup is shown on the daily chart of UUP below:



Yesterday's intraday high of UUP coincides with convergence of the 50-day MA (the teal line) and three-month downtrend line. As such, a rally above yesterday's high, within the next day or two, would trigger a valid buy entry for traders looking for an ideal entry point. Because we bought the late July pullback to the 200-day MA (the orange line), we have already been long UUP for just over a month. The early August "undercut" of the 200-day MA nearly triggered our protective stop, but UUP has since climbed back above our entry point, and the trade is now showing a small unrealized gain. Now, we like that the 200-day MA provided firm support on the September 3 pullback. Nevertheless, a breakout above the 50-day MA within the next several days is necessary in order for us to continue holding the position.

Open ETF positions:

Long - DBA, UUP, TUR
Short (including inversely correlated "short ETFs") - SSG, EPV

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.