Potential buy setup forming in Dollar Index ETF (UUP)


Stocks rebounded from session lows on Wednesday to significantly pare opening losses and close the day mixed. The S&P MidCap 400 showed the most weakness on the session as it dropped 0.7%. The Dow Jones Industrial Average and the small-cap Russell 2000 lost 06.% and 0.1% respectively. However, both the Nasdaq and the S&P 500 managed to close flat on the day. Yesterday’s reversal could reasonably be expected following two days of broad market selling.

The market took a breather from distribution yesterday as market internals were mixed. Volume was higher across the board. Turnover increased on the Nasdaq by 7.2% and on the NYSE by 10.2%. Despite the intraday recovery declining volume still outpaced advancing volume on both exchanges. The spread ratio fell in favor of declining volume by a factor of 1.2 to 1 on the NYSE and 1.9 to 1 on the Nasdaq. Although volume was up on the session and declining volume outpaced advancing volume across the board, the mixed price action indicates that neither accumulation nor distribution took place in the market yesterday.

Due to the intraday reversal, we decided to cover both of our short positions yesterday. Our trades in IWM and EWJ both resulted in modest but reasonable profits in absolute dollar terms. We are now 100% cash in the model account. Please note that we are removing FXZ from the watchlist since the recent price action in this ETF has nullified the setup.

The PowerShares DB US Dollar Bull ETF (UUP) recently broke out of a protracted downtrend on a significant expansion in volume. Unlike stocks, large increases in volume are much more likely to be a proximate indicator to a change in trend with currencies. Volume often provides an early clue that a trend reversal may be on the horizon with equities but it generally does not provide an immediate indication as a technical tool. Now that UUP has broken above the downtrend line, the 20-day EMA and the 50-day MA, it now presents a possible buying opportunity on a pullback to the 20-day EMA. We will be closely following this ETF for a potential long entry.

In yesterday’s Newsletter we discussed the possibility of DBA as a short setup. We stated, “This ETF would likely provide an ideal shorting opportunity with a move back above the two day high of $32.57. Typically, a “shakeout” move like this is needed prior to a possible move lower. The obvious entry would be a drop below the three day low but the market generally doesn’t reward the obvious“. Notice how DBA “suckered” in the bears with a blatantly obvious undercut of the three day low at $32.02. This move serves to both draw in short sellers and sweep stops placed too close to support. Now that phase one of this setup is complete we will continue to monitor this ETF as a short entry. The chart of DBA from Tuesday’s newsletter is provided below for easy comparison.

Given the sharp selling over the past few days, we would expect to see a bounce in the market. It will be interesting to see how the market reacts now that internals have moved to the bearish camp. Other than the DJIA all of the major indices are in danger of losing support of their respective 50-day moving averages. If the broad market can’t find the strength to hold support at the current levels and rally firmly back above the above the 50-day and/or 20-day moving averages, a sharp round of selling could very well occur.

Today’s Watchlist:

There are no new official setups for today. As always, we will send an Intraday Alert if any new trades are made.

Daily Performance Report:

Below is an overview of all open positions, as well as a performance report on all positions that were closed only since the previous day’s newsletter. Net P/L figures are based on the $50,000 Wagner Daily model account size. Changes to open positions since the previous report are listed in red text below. Please review the Wagner Daily Subscriber Guide for important, automatic rules on trigger and stop prices

    position summary

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  • Per intraday alert, covered IWM and EWJ to lock in some gains. FXZ was removed from the watchlist.

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      Edited by Deron Wagner,
      MTG Founder and
      Head Trader