One Top ETF Pullback And One Hot ETF Breakout: Swing Trade Setups
Deron Wagner | Feb 13, 2013 12:58AM ET
We continue to monitor iShares FTSE China 25 Index Fund (FXI) for a low-risk pullback trade swing trade entry point. On the weekly chart of FXI below, notice the price has just clipped intermediate-term support of its 10-week moving average, which is basically the same as the 50-day moving average on a daily chart:
The 10-week moving average/50-day moving average is an important technical indicator because it typically represents the level where mutual funds, hedge funds, banks, and other institutions look to buy leading stocks and ETFs when the broad market is in a strong uptrend.
Looking at the chart above, notice the weekly uptrend line is also providing support. However, the price has only touched this trend line once (other than the starting point), back in November/December of 2012. In order for a trend line to act as a reliable indicator of support or resistance, we prefer to see at least two touches (plus the original starting point). For example, if $FXI holds support of the uptrend line here and then pushes higher, it will then have had two significant touches (Nov. 2012 and Feb. 2013) since the original starting point. For additional confirmation, we would also like to see $FXI recapture support of its 50-day moving average on the daily chart before we establish a swing trade buy entry.
Another ETF looking pretty bullish is SPDR S&P Emerging Markets Small Cap (EWX). On the weekly chart below, note the tight-ranged consolidation above the rising 10-week moving average, which followed a breakout from a strong base of support at the $45 area.
The clear entry point for this momentum trade setup is a breakout entry above the highs of the trading range. One could establish small initial share size prior to the actual breakout, but it is important to wait for the breakout before going in with full size. Jumping the gun in trading can occasionally work in one’s favor, but most of the time it is quite dangerous and not healthy for overall trading profits.
Overall, the current uptrend in the broad market remains in great shape because we have yet to see any significant loss of momentum over the past two weeks. As such, we still view any pullback in the major indices as a low-risk buying opportunity. In a healthy market, short-term pullbacks are normal, as extended stocks take a break and new breakouts emerge (bullish rotation).
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