Looking our our current ETF holdings, $SMH, $FCG, and $USO are basically range-bound, while $IHI and $FDN continue to trend higher above the 10-day moving average. $FDN is still trading above the breakout pivot at 49.50, which is also a good sign, as a false breakout from a short-term consolidation in an extended stock or ETF can often lead to a sharp reversal.
As we have mentioned several times in recent weeks, our ETF scans have been coming up mostly dry because the strongest ETFs have been too extended to provide a positive reward to risk ratio for buy entry. Therefore, a short-lived pullback in the broad market could solve this problem (just as long as leading individual stocks continue to hold up well). Now, we are currently scanning ETFs with relative strength to put on our radar screen for potential pullback buy entry. One such ETFs is Direxion China Bull 3x ($YINN), an international ETF tied of the performance of the Chinese stock market (and leveraged to move at 3x the underlying securities).
After a four day shakeout below the 50-day MA, iShares MSCI Japan Index ($EWJ) is now back above the 50-day MA and the 20-day EMA as well. We look for the price action to hold above $11 from here on out. On the daily chart, note that the 20-day EMA was below the 50-day MA as the price action pulled back in during May and June. The 20-day EMA is now back above the 50-day MA, and there are now two higher lows within the base on 6/24 and 7/29.
Since the beginning of this year, the trading range of $IGE has tightened up significantly and it now appears as though an actionable buy entry into this ETF may soon occur. Drilling down to the weekly time frame, notice that $IGE is poised to imminently break out above horizontal price resistance.
Our long position in iShares U.S. Medical Devices ETF ($IHI) is back in trend mode after a six bar consolidation above the 10-day MA. Yesterday’s gap to new swing highs could lead to a another 2-3 points of upside. The trade should be in good shape in the short-term as long as the price action holds above the dirty uptrend line. We call it a dirty uptrend line because there are a few candles that the line crosses through, but we have always taken the approach that technical analysis is part art and part science. With trendlines, we go with what makes sense.
In the July 30 issue of The Wagner Daily, we said, “The First Trust ISE Revere Natural Gas ETF ($FCG) hasn’t done much at all this year but chop around in a tight range. However, looking at the monthly chart, we see that the current consolidation is just below the monthly downtrend line.” Yesterday, after gaining 0.6%, $FCG is now within striking distance of breaking out above its high of the past several weeks. If it does, we plan to buy it in anticipation of bullish momentum carrying it substantially higher in the near-term. The first buy will be on reduced share size, as we wait for confirmation in the form of a weekly breakout to add to the position.
Moving averages play a very big role in our daily analysis, and we rely heavily on certain averages to locate low risk entry and exit points. For gauging momentum in the short-term, the 5 and 10-day moving averages work very well. For example, if a stock or ETF is above the 5-day MA, there is almost no good reason to sell, unless the price has made a 25-30% advance in a few days. The 10-day MA is also a very good moving average to help ride the trend with a bit more wiggle room. For trend traders, no stocks or ETFs should really be sold while they are above the 10-day MA after a strong breakout. For example, look at the difference between $USO and $FDN at the highs. $FDN held above the rising 10-day MA minus a little shakeout, which is a sign that the momentum from the breakout is still strong.
Our weekend ETF scans did not produce much in the way of actionable setups. Our $EWJ buy stop order remains live, but the price action broke down below the 50-day MA yesterday. Hopefully $EWJ can climb back above the 50-day MA by the end of the week. Pullback buy setups in $USO and $GSG remain in play. Note that the risk on $USO is only 5% of max because we are only adding back the 40 shares we stopped out of last week. Since the stop is only a point wide, the dollar risk is very small.Guggenheim Solar ETF ($TAN) has struggled with the $28.50 level (top of the range) over the past 10 sessions. Because of this, $TAN may have to visit the lower end of the range around $27 to shake out some of the weak hands. We expect the price action to hold the $26.50 – $27 level, minus a shakeout day or two, as there is also support from the rising 20-day EMA
The U.S. Oil Fund ETF ($USO) has pulled back to touch support of its 20-day exponential moving average for the first time since breaking out at the beginning of the month. This is shown on the daily chart below
$EWJ gained approximately 4% over the following two weeks, as the index began working its way back to its prior highs. Now, $EWJ has pulled back to new horizontal price support of its early July breakout, thereby providing us with a low-risk swing trade buy entry. The setup is shown on the daily chart of $EWJ below: