As the broad market has been consolidating and digesting its recent gains over the past month, $SMH has been holding up well and we remain long our partial position from the May 23 entry. However, now that the 50-day moving average has finally risen to meet the price of $SMH, we are also prepared to add to the swing trade position, in anticipation of a pending resumption of its new uptrend and a breakout to a new 52-week high.

Below is the daily chart pattern of $SMH:

As you can see, the June 13 intraday low in $SMH nearly coincided with a kiss of its rising 50-day MA (teal line). When an ETF or stock with relative strength breaks out of a base, the first subsequent pullback to the 50-day MA typically presents a low-risk buying opportunity because it is this level where institutions often step back in to buy.

Rarely will the first retracement to a 50-day MA that follows a substantial breakout fail to hold up on the first test (although “undercuts” of one or two days are common). As such, subscribing members of our swing trader newsletter should note we have listed $SMH as a potential buy entry. Please see the “Watchlist” section of today’s report for our exact trigger, stop, and target prices for this setup.

In this June 6 blog post, we pointed out the “triple convergence of support” that was forming in the S&P 500. Specifically, we highlighted how key intermediate-term support of the 50-day moving average, dominant uptrend line, and horizontal price support from the prior highs were all merging together. To refresh your mind, here is the exact chart of the S&P 500 SPDR ($SPY) we showed that day:

The very next day, the S&P 500 “undercut” that area of support on an intraday basis, but formed a bullish reversal candle to close above it. Such a bounce was not surprising, as the more technical indicators that converge to form support, the more significant that support becomes.

After the formation of that triple convergence of support on the S&P 500, we indeed expected a bounce, but also still expected the broad market to consolidate a bit longer before resuming its uptrend. Now that stocks have been trading in a range for the past few weeks, the 50-day moving average has again risen up to provide support for $SPY (just like the $SMH chart). Here is the current snapshot of $SPY:

The charts of both $SMH and $SPY above are great examples of the significance of the 50-day moving average as an intermediate-term indicator of support. However, it’s important to realize that stocks and ETFs are more likely to bounce off the 50-day MA if it is only the first touch of the 50-day MA that follows a convincing breakout from a valid base of support.

Each subsequent test of the 50-day MA that occurs before the index or stock breaks out to another high technically weakens support of the 50-day MA and thereby increases the odds of a breakdown below it. As such, it would be a negative sign for the market if $SPY and/or $SMH break down below yesterday’s lows (which would correspond to a break of the 50-day MAs).

Although our market timing model just shifted from “buy” to “neutral” yesterday, it does not mean the dominant market uptrend is dead. Rather, it simply tells us to take it easy with regard to both the quantity of new swing trade entries AND the total share size (exposure) of new trade entries (Editor’s Note: Due to the bullish follow-through that occurred the same day this article was published, our timing system shifted back into “buy” mode on June 14).

As long as the major indices and leading sectors hold their 50-day MAs while continuing to consolidate, stocks still technically look good for another move higher, which would pick up where the April to May rally left off.

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The post Why The 50-Day Moving Average Is A Great Technical Indicator appeared first on the blog of Morpheus Trading Group.

In the trading session that immediately followed those comments, the major indices formed bullish reversal candles on their daily charts, as several of the indexes “undercut” near-term support of their 20-day exponential moving averages.

Without a doubt, this fooled many bulls into thinking the worst of the broad market correction was over. But traders who have been paying attention to the bigger picture of what’s happening avoided jumping back into the market so quickly, and yesterday’s breakdown to new “swing lows” shows they were correct in doing so.

Despite Monday’s bullish reversal candles, we continued playing defense because one of the most important and reliable indicators of technical analysis is the volume patterns of the broad market (this was the focus of our May 3 commentary).

Until we start seeing the return of convincing, higher volume “up” days (accumulation), as well as a cessation of higher volume “down” days (distribution), there is no reason to aggressively jump back into the stock market. Furthermore, we need to see healthy patterns and breakouts once again begin re-emerging in leading stocks.

The good news about the current state of the broad market is that the benchmark S&P 500 Index is now nearing triple convergence of key support levels: intermediate-term support of its 50-day moving average, the long-term uptrend line from its November 2012 low, and a substantial level of horizontal price support.

This triple convergence of support is annotated on the daily chart of S&P 500 SPDR ($SPY), a popular ETF proxy for the S&P 500 Index:

Typically, the first pullback of a stock or index to its 50-day moving average (following a strong rally) sparks the return of institutional buying activity. As you can see on the chart above, $SPY could easily come into contact with its 50-day MA with just one more substantial down day in the broad market. There is also the equally important uptrend line that has been in place for approximately 8 months.

Nevertheless, a simple test of the 50 day MA does NOT automatically give us the “all clear” signal to go ahead and start buying like a maniac. Rather, it simply tells us we should definitely be on the lookout for the possible return of institutional buying and money flow into leading stocks. If that happens, be assured we will be fully prepared to take advantage of entering new swing trades in the stocks and ETFs that have been showing the most relative strength during the correction, as those are the equities that are likely to lead the market higher when the uptrend attempts to resume.

Having not even pulled back to touch its 20-day exponential moving average yet, Guggenheim Solar ETF ($TAN) remains one of the strongest ETFs in the market right now. Market Vectors Semiconductor ETF ($SMH) is also holding near its 20-day EMA and continues to show relative strength to the Nasdaq. Still, neither are yet presenting us with valid, actionable re-entry points.

Frankly, there’s not much value in our team analyzing and discussing a bunch of stocks and ETFs that are not yet close to being actionable, so our daily analysis will be more brief than usual until we see the new emergence of potential trade setups worth talking about. Until then, we are fully content to manage existing positions and mostly watch from the sidelines.

While stocks are in correction mode, this is a great time to try out the “Pullback” scan of the new MTG Stock Screener. In our nightly Wagner Daily newsletter, we always hand pick the best pullback trade setups and provide you with the exact entry and exit points for trading them. But for those of you who are more the “do-it-yourself” type, you will enjoy using the preset stock scans of our screening software, and will likely find some stocks to put on your radar screen as potential buy candidates in the coming days and weeks.

Please note the Pullback scan is pre-programmed to work best with shorter-term pullbacks of just 3 to 5 days. As such, there may be a minimum number of trade candidates returned in the screening results. However, it may still find a diamond or two “in the rough.” Either way, give it a try because it is presently free while in beta mode: http://www.morpheustrading.com/services/stock-screener.

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The post Why Triple Convergence Of Support On S&P 500 May Soon Attract Buyers appeared first on the blog of Morpheus Trading Group.

Rather than looking at individual ETF swing trade setups in today’s newsletter, most of which are not looking so hot right now, let’s take an updated look at the technical picture of the NASDAQ Composite. Since the NASDAQ showed the most leadership of the broad-based stock indexes during the most recent leg of the rally, it is the price action of this index we want to pay attention to the most.

Of all the technical indicators at our disposal, volume (and obviously price) is the most important indicator to follow. When stocks are moving higher on increasing volume, it indicates support among institutional players. Conversely, the presence of higher volume selling indicates that the “big boys” are selling. Since institutional trading accounts for more than 50% of the stock market’s average daily volume in any given day, the bias among institutional players always has a direct impact on the subsequent direction of the market.

The biggest concern in the market right now is not that stocks are pulling back from their highs, but that they are doing so on higher volume, along with several instances of “stalling” price action. The daily chart of the NASDAQ below illustrates this:

As you can see, there have been three clear-cut “distribution days” (higher volume declines), along with two days of stalling action, over the past two weeks. This has created clearly-defined resistance at the 3500 level. As such, the stock market will likely need more time to consolidate its recent gains before moving higher. Increasing day to day volatility is also a sign of a market that may be headed for at least a short-term correction.

We view stock market corrections and pullbacks as positive, healthy, and necessary unless two things happen: 1) the major stock market averages start breaking down below the 50 day moving averages 2) leading individual stocks start breaking down en masse, violating obvious levels of support.

So far, all the main stock market indexes are still firmly above their 50-day moving averages. However, the performance of leading stocks has been starting to suffer, which is a warning sign to the bulls.

Many new traders are of the assumption that trendlines need to either be clearly defined levels of support OR levels of resistance. However, this is not always the case. Sometimes, a trendline will act as the upper channel resistance of an uptrend, but then the angle of the uptrend increases, which causes that prior level of trendline resistance to become the new level of support. This is what has happened in the NASDAQ, as you can see on the daily chart below:

Despite recent weakness in the market, both the NASDAQ in small-cap Russell 2000 index are showing relative strength to the broad market by continuing to hold above their 20 day exponential moving averages. Furthermore, if the NASDAQ continues to hold above the trendline shown in the chart above, it will be very positive sign for the broad market.

Nevertheless, this is not the time to step on the gas pedal. Instead, it may be best to lock in gains on existing positions of stocks and ETFs you do not intend to hold through a pullback.  Our plan is to lay low this week and see how both our Wagner Daily open positions and the broad market plays out. As in sports, sometimes playing proper defense is the best move in stock trading.

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The post Why Now Is Not The Time To Step On The Gas With Your Trading appeared first on the blog of Morpheus Trading Group.

Dropping down to the weekly time interval, we see the 10-day MA (teal line) above the 40-week MA (orange line). Like the test of the downtrend line on the monthly chart above, we see the same below, with last week’s test of the downtrend line and the 40-week MA.

For this setup to remain constructive, the price action should hold above the 40-week MA and the higher “swing low.” It may take several weeks for the price to tighten up on the right hand side, so we will place $MOO on a second tier watchlist (one that is reviewed only on the weekends):

After finding support around the $23 area, Guggenheim Solar ETF ($TAN) continues to push higher, above the rising 10-day MA. As you may recall from this recent blog post, we’re holding a long position in this ETF (currently showing an unrealized gain of 10.5% since our May 23 pullback entry). The daily chart below details the support in $TAN:

Should $TAN fail to punch through the $26 level and pull back in (for a week or two), there is solid support from the uptrend line and the 20-day EMA around $23. Overall, this ETF continues to show great relative strength as the broad market consolidates.

In addition to $TAN, we also bought Market Vectors Semiconductor ETF ($SMH) when it pulled back on May 23. It too continues to act well, and closed yesterday right at resistance of its prior swing highs from mid-May. As such, we are selling partial share size on today’s open, just to lock in a decent gain on this short-term momentum trade. We will trail a protective stop higher on the remaining shares.

As mentioned earlier this week, our ETF scans have not produced much in the way actionable setups, so a short-term break in the market should eventually produce some low-risk buy points. Until then, we will simply remain patient and focus on managing existing positions.

The commentary above is a shortened version of the May 31 issue of The Wagner Daily swing trade newsletter. Sign up today for your risk-free 30-day trial subscription by clicking here.

The post Agriculture ETF Starts Sprouting, As Solar ETF Still Shining Brightly appeared first on the blog of Morpheus Trading Group.

Because bearish follow-through momentum from the May 22 sell-off carried through into the May 23 open (as anticipated), both ETF swing trade setups triggered for “official” pullback buy entry, and have been acting well since then.

As of this moment, the rather volatile $TAN is already showing an unrealized gain of 8.9% since our May 23 buy entry of $23.45 (where we grabbed some shares on a pullback to the 10-day MA). From here, we would ideally like to see the ETF build a base of consolidation near the highs, then breakout to a new high within the next several weeks.

The other trade we entered on the May 23 open was $SMH, which we swiped at $37.68 as it pulled back to test substantial near-term support of its 20-day exponential moving average (for the first time since its breakout).

The following day, $SMH formed a bullish “hammer” candlestick and closed above its 20-day EMA for the second straight day. The daily chart below illustrates this (based on most recent closing price of May 24):

Based on the healthy pullback of $SMH that is holding the 20-day EMA, the ETF should be well positioned to climb back to the highs as long as the broad market holds steady.

If we get a little bit of help from the market, in the form of a bounce this week, $SMH should be among the first industry sector ETFs to outperform due to the relative strength $SMH was exhibiting on the way up.  An added bonus is that we are now back into this ETF at a much lower price than our most recent exit at $38.44, when we sold $SMH for a 9% gain on May 13.

On May 6, iShares Malaysia Index Fund ($EWM) gapped up 6% to a fresh all-time high. Since this was a confirmed breakaway gap, we have been stalking this ETF for the past several weeks, waiting for a base of consolidation to form and the moving averages to rise up and provide support.

Last Friday (May 24), $EWM gapped down to “undercut” support of its 20-day exponential moving average:

From here, we will be watching to see if $EWM forms some sort of bullish reversal bar and closes back above the 20-day EMA. If it does, it could present a possible buying opportunity the following day (above the prior day’s high). For now, it is not actionable on today’s watchlist, but we will be sure to notify subscribers of our nightly swing trade newsletter if/when we decide to buy as an “official” swing trade on our watchlist.

The post Top 3 ETFs To Buy As Stock Market Pulls Back ($TAN, $SMH, $EWM) appeared first on the blog of Morpheus Trading Group.