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Potential Short Setups In (EPU) And (ECH)

 January 13, 2011 09:30 AM

The major indices posted healthy gains on Wednesday, but on mixed volume. Stocks gapped up at the open and consolidated at the highs for the remainder of the day. All five indices closed at their highest level since the market rally began in early 2009. The S&P 500 led the advance by posting a 0.9% gain on the session. Following closely, the small-cap Russell 2000 and the Nasdaq both finished the day 0.8% higher. The Dow Jones Industrial Average rose 0.7% while the S&P MidCap 400 posted a 0.6% advance.

Turnover finished mixed for the second consecutive day. Volume on the NYSE increased by 2.7%, while the Nasdaq saw volume decline by 1.3% in yesterday's session. Even though trade was somewhat muted, advancing volume outpaced declining volume on both indices. The advancing to declining volume ratio ended the session at 4.7 to 1 on the NYSE and 3.5 to 1 on the Nasdaq. Stocks continue to rally in the absence of serious volume.

[Related -The Eurozone: On The Road To Recovery With A Lingering Risk]

IEV hit its stop yesterday and we exited the trade. We are removing THD from the watchlist as we have found it difficult to borrow shares. All other positions remain intact. PHO and PBW have been performing particularly well. PBW finished the day up 1.6% while PHO posted a 1.9% gain.

The iShares MSCI Chile Investable Market ETF (ECH) could provide a shorting opportunity with a rally back to the declining 20-day EMA. Prior to yesterday, ECH was under heavy selling pressure for six consecutive sessions. This selloff shattered a seven month trend line in this ETF. ECH found support just below the 20-week EMA (see weekly chart). Note that the horizontal resistance line found on the weekly chart corresponds almost exactly with the 20-day EMA. We will continue to monitor ECH as a possible short candidate.

[Related -Aversion to the Mean]

The iShares MSCI All Peru Capped Index ETF (EPU) recently broke its trend line and lost support of the 20-day EMA and the 50-day MA amidst substantial volume. A rally back into resistance at these key moving averages, or a drop below the January 10th low of $46.85, may present an opportunity to short EPU.

Due to the recent whipsaw price action and accompanying gaps, we are inclined to wait for new setups to form rather than chase the market. We are wary that breakouts may not follow through because of light volume in the broad market.

NOTE:Regular subscribers to The Wagner Daily receive daily updates on the open positions above, as well as new ETF trade setups, including trigger, stop, and target prices. Intraday Trade Alerts are also sent via e-mail and/or mobile phone text message on as-needed basis.

Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (morpheustrading.com), which he launched in 2001. Wagner appears on his best-selling video, Sector Trading Strategies (Marketplace Books, June 2002), and is co-author of both The Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader (McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and Yahoo! FinanceVision. He is also a frequent guest speaker at various trading and financial conferences around the world. Wagner is currently working on this third book, scheduled for publication in early 2008.For a free trial to the full version of The Wagner Daily above, which includes detailed ETF trade setups and daily position updates, or to learn about our other newsletters, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com
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