Rather than predicting when a trend will end or how much the market will pull back during a correction, we try to keep it simple by focusing on the price action of leading stocks and ETFs. The idea is not to predict market action, but to react to it. So if leading stocks bounce back next week and/or hold key support levels, then we have to assume the market is still healthy and will eventually head higher after a short break. If those same leading stocks begin to break down below the 50-day MA with wide candles and big volume, then the market could potentially be headed for a deeper correction.

Our pullback buy limit orders in $TAN and $SMH triggered on the open and reversed higher to close in the money. The plan is to keep the stops on both positions loose for one more day and adjust them over the long weekend.

$TAN held support of the 10-day MA, which is where stocks or ETFs will often find support in a very strong uptrend:



Along with the 10-day MA, there is support from the rising 20-day EMA and short-term uptrend line, around $22.

After stalling out near the prior swing high on Wednesday, Guggenheim China Real Estate ($TAO) opened below the 20-day EMA, right at our previous entry point on 5/1. For the setup to remain bullish in the short-term, $TAO should hold above the rising 50-day MA and uptrend line. A break of these levels would indicate that the setup needs more time to consolidate. Note that we raised the stop in $TAO yesterday

 

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.