The inversely correlated ProShares UltraShort Europe (EPV) has broken out above a three-month downtrend line, and has also reclaimed support of its 50-day moving average. This positions the ETF for potential buy entry in the near future, in anticipation of a new, intermediate-term uptrend. The daily chart of the EPV below illustrates the setup…

In the August 17 issue of The Wagner Daily, we said, “TLT will bump into resistance of its 50% Fibonacci retracement level just above yesterday’s (August 16) high. However, given that TLT just broke out yesterday, it’s more likely it will rally nearer to the 61.8% Fibonacci level before running into substantial selling pressure. For now, we’re planning on selling TLT into strength, locking in a nice gain, at the $108 to $109 area.” Yesterday morning, as the stock market sold off, TLT surged higher, moving above the $108 level for the first time since March of 2009. As such, we followed the plan mentioned in our August 17 commentary, and sold TLT into strength as it tested $108. Including monthly dividend distributions at the beginning of July and August, we netted a gain of more than 10 points (and 10%) on the trade.

Although stocks have sold off in each of the past three days, and set new closing lows for August yesterday, the main stock market indexes are still holding near their intraday lows of the previous week. Furthermore, support of the mid-July lows is still holding up. Overall, the technical picture of the market hasn’t changed much in recent days. However, the major indices could break down below key levels of horizontal price support with just one more day of selling. If that happens, a test of the July lows, which is also lower channel support of the four-month sideways trading range and “inverse wedge” pattern, would likely follow. Looking particularly vulnerable is the small-cap Russell 2000 Index, which is only about 2% above its July low.

As anticipated the semiconductor sector remains weak. Consequently and as expected the inversely correlated UltraShort Semiconductor ProShares (SSG) performed well. On light volume it tested the 200-day moving average and managed to close just 4 cents below Thursday’s closing price.

Yesterday’s selloff caused both the S&P 500 Index and Dow Jones Industrial Average to slide back below their 50-day moving averages. Both indexes also set new closing lows for August. The Nasdaq Composite, which failed to reclaim its 50-day moving average when the S&P and Dow did, settled just a few points above this month’s closing low. Overall, the near-term technical picture of the broad market apparently does not bode well for the bulls. Therefore, dipping a toe in the water on the short side of the market right now could be a decent proposition; another wave of selling in the broad market could spark bearish momentum that since the major indices back down to test their July 2010 lows. At that point, astute traders could look to take profits on any near-term short positions. Nevertheless, since the major indices are still near the middle of their multi-month trading ranges, this is not the time to be heavily exposed on either side of the stock market. This is further compounded by the fact that today is monthly options expiration day, which is typically marked by erratic price action.

Agricultural commodities continue to perform well, and PowerShares Agriculture Fund (DBA) may be poised to soon make another leg higher. After surging higher in early August, DBA pullback to short-term support of its 20-day exponential moving average on August 11. It only stayed there one day, as DBA moved back up in the following session, triggering our reentry on the long side. Since then, DBA has been consolidating in a tight, sideways range, near its recent highs, for the past five days. A rally above the high of that five-day range should lead to a resumption of its intermediate-term uptrend. Traders who missed our initial entry point could consider a secondary entry on that breakout above the range. However, DBA could continue to build a base for another week or so.

Over the past month, we’ve noted the relative strength and bullish chart patterns of select international ETFs, primarily those in emerging markets. Recently, we’ve also been discussing the strength of fixed income (bond) ETFs. If combining those two areas, it would be logical to assume a bond ETF focused on emerging markets would be the best of both worlds. Indeed it would be, and iShares Emerging Markets Bond Fund (EMB) has been one of the strongest trending ETFs since the beginning of July.

Many industry sectors have been moving in sync with the major indices in recent weeks, but the Semiconductor Index ($SOX) has been showing major relative weakness. The S&P 500 Index has only retraced approximately 50% of its range from the July low to August high, but the $SOX has already fallen all the way below its July 2010 low, and is nearing its February 2010 low. Therefore, if the broad market is unable to stage a meaningful bounce in the coming days, the semiconductor ETFs may break down below major levels of support, creating potential short sale entry points. The ProShares UltraShort Semiconductor (SSG) is an inversely correlated “short ETF” that is setting up for buy entry, and will trigger if weakness continues in the $SOX.

On August 12, the S&P 500 “undercut” obvious support of its 50-day moving average. We frequently discuss the bullishness of this type of setup when an ETF snaps back above its key level of support the following day. Therefore, going into last Friday’s session, we were looking for the S&P 500 to move back above its 50 day moving average, which would have been a relatively low risk entry point for new long positions. However, in order for the “undercut” to be effective, an immediate move back above the support level is key. As the S&P 500 closed lower on Friday, it remains below its 50-day moving average going into today’s session. As such, a break below the lows of the past two days could lead to another leg down, driven by greater intensity of bearish momentum. But overall, the S&P 500, as well as the rest of the major indices, are now trading near the middle of their intermediate-term ranges. Put another way, stocks enter the new week in “no man’s land.”