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The Wagner Daily ETF Report For June 5
By Deron Wagner | Published  06/5/2012 | Stocks | Unrated
The Wagner Daily ETF Report For June 5

Following Friday's horrific performance, stocks ended Monday's session mixed, on light trade. Stocks did, however, close well off session lows. The Nasdaq exhibited relative strength yesterday, as it was the only major index to close higher on the day. By the closing bell, the tech-rich index had tacked on 0.5%. Both the S&P 500 and the small-cap Russell 2000 closed flat on the day. The Dow Jones Industrial Average fell a modest 0.1%, while the S&P MidCap 400 lost 0.5% on the day.

For a second consecutive day, market internals were mixed. Volume fell by 14.0% on the NYSE and 11.0% on the Nasdaq. Declining volume modestly outpaced advancing volume by a factor of 1.8 to 1 on the NYSE. However, advancing volume narrowly outperformed declining volume on the Nasdaq. By the close, the spread ratio stood at a plus 1.1 to 1 on the Nasdaq.

Yesterday, on a spike in volume, the ProShares UltraShort Oil and Gas ETF ($DUG) formed a distinct reversal candle and now could offer a buying opportunity on a pullback into support near its 10-day and 20-day moving averages. We will be monitoring this ETF closely for a potential pullback buy entry, and will list our exact entry and exit prices on the "watchlist" section of The Wagner Daily stock newsletter if we enter DUG as a swing trade. With the "pullback entry" swing trade setup, we look for an ETF or stock to "undercut" a key moving average or support level, and subsequently form a reversal candle. Then, a move above the high of that reversal candle serves as the pivot for a possible buy entry. In this example, the potential long entry would occur on a move above the hypothetical reversal candle drawn on the daily chart below:



Although the stock market recovered to close well off session lows, yesterday's reversal attempt was far from impressive. Volume was light, suggesting institutions were not actively participating in yesterday's recovery. Still, as thoroughly discussed in yesterday's ETF trading commentary, all five major indices have now "undercut" their respective 200-day moving averages, so the broad market could reverse at any moment. We are prepared for the possibility of one more sharp "capitulation day," but it is not necessarily required in order for the main stock market indexes to reverse off current levels. Even if the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average do move lower from here, the potential reward is not significant enough to assume additional risk on the short side of the market.

Our nightly scans turned up very little in the way of actionable swing trade setups on the short side of the market, and our market timing system remains in "sell" mode. As such, we are forced to be in "SOH mode" (sitting on hands) and wait for low-risk entry points to develop. I know sitting in cash is not exciting, but trading is NOT about satisfying the need for action. Running a disciplined trading system is boring because it is extremely repetitive. We run the same scans just about every night, looking for the same technical swing trade setups year in and out, with some tweaks in strategy along the way. But such patience and disicipline to required in order to generate consistent trading profits year in and year out. Being patient is crucial right now, as we want to avoid giving back last month's large profits by getting caught in a short squeeze.

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.