After a week-long shakeout below the 50-day moving average in early December, the iShares Home Construction Index ($ITB) broke out and closed at new 52-week highs yesterday. The base started back in October, with $ITB stalling out just below $21.00 after a 20% move above the prior base. The early December shakeout formed a necessary higher swing low on December 6, after a violent shakeout below the 50-day MA in mid-October. Although we missed the breakout, we will continue to monitor the price action for a second breakout entry or a pullback entry on 3-5 days of weakness:



Energy Select SPDR Fund ($XLE) cleared a downtrend line and reclaimed its 50-day moving average on Tuesday. $XLE has put in a series of higher highs and higher lows over the past few weeks since holding support of the 200-day MA in late November. This is not an actionable trade, but it is always a positive sign for the market to see more participation in a rally:



Several days ago, we said the Nasdaq (and $QQQ in particular) may be poised to head back down in the near to intermediate-term. This assessment was based on objective technical analysis that showed several of the major indices forming a bearish "shooting star" candlestick patterns on their weekly charts, combined with the Nasdaq breaking below support of its 20, 50, and 200-day moving averages. However, technical analysis never guarantees a particular outcome (we would all be multi-billionaires if that was the case). Rather, the purpose of technical analysis is merely to give us a consistent, slight mathematical edge over the long-term. This means we will obviously have losing trades on a regular basis, just as we've had over the past 10 years. However, as long as the capital losses of the average losing trades are at least 1.5 to 2 times smaller than the average winning trades, we know our results will be consistently profitable over time (as shown here on our website).

Based on the above analysis from several days ago, we recently initiated a short position in the Nasdaq through buying an inversely correlated "short ETF" ($QID). Yesterday, this position hit our stop price just two days after entry, which means we were clearly wrong (and have no problem admitting so). But most importantly, our capital risk for this trade setup was controlled beforehand by pre-determining a reduced share size that limited our risk on the trade to just $200 (less than half our normal full risk on a swing trade). Therefore, although it may be disappointing that the trade didn't work out, losing trades are simply part of the business, and is not something we are ever concerned about. This is because we simply move on to the next trade opportunity, while continuing to follow our proven swing trading strategy that has enabled us to consistently outperform the broad market since 2002.

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.