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Potential Short Setup In (EFA)

 March 23, 2011 09:45 AM

Stocks sold off marginally on Tuesday amidst light trade. In a reversal of yesterday's action, mid-cap and small-cap stocks led the decline. The S&P MidCap 400 and the small-cap Russell 2000 fell by 0.7% and 0.5% respectively. The S&P 500 shed just under 0.4%, while the Nasdaq dropped 0.3%. The blue chip Dow Jones Industrial Average posted a modest 0.2% decline on the day.

Market internals ended the session mixed. Volume fell on both the Nasdaq and the NYSE yesterday. Turnover declined on the Big Board by 17.4% and on the Nasdaq by 6.1%. Declining volume was greater than advancing volume by a ratio of 2.1 to 1 on the NYSE and 1.7 to 1 on the Nasdaq. Tuesday's internals provided little clue as to the market's next move. In yesterday's newsletter we elaborated on the key zones of resistance on the Nasdaq, DJIA and the SPY. Today we will look at key support levels. Support and resistance levels play an important role in deciding when to enter or exit a trade. In addition to keeping a close eye on support and resistance levels on open positions, we carefully monitor support and resistance levels on the major indices. This review provides valuable information as to the relative strength/weakness of each of our positions. Further, it assists us in our exit strategy. For instance, if we were long an ETF and the market was approaching a key resistance level, we may consider exiting (or lightening up) on the position even if it had not yet reached its target. Despite the relative strength or weakness of an ETF, it is difficult to fight the broad market trend.


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After a violent selloff, the iShares MSCI EAFE Index ETF (EFA) has just as abruptly rallied back into resistance. A volume fueled move below the two day low ($58.80) may provide a short entry trigger for this ETF. We will be monitoring EFA for a possible short entry.

The broad market was directionless yesterday. It is not unusual to see a day or two of deliberation after a significant move in the market. The fact that the 20-day EMA has crossed below the 50-day MA on the Nasdaq, S&P 500 and the DJIA, suggests another move lower. Nonetheless, a two year bull market doesn't generally give up without a fight. We are not suggesting the bull market has ended. Rather, now that key moving averages have failed to provide support, the number of investors/traders looking to take profits or short the market typically increases significantly.

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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