The Trader Daily

 | May 09, 2014 | 7:30 AM EDT
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Short-term traders love to sell weak markets on strength, and that's exactly what they did in the iShares Russell 2000 ETF (IWM) on Thursday. The IWM, led by strength in a number of beaten down momentum names, rallied from $109.50 to $111.25 during the first forty-five minutes of Thursday session. But that strength began to evaporate after 12 p.m., and by the close of trading the IWM was flopping around aimlessly at $109.

As we've discussed on a regular basis over the past six weeks, the IWM is notably weaker than the SPDR S&P 500 Trust (SPY), and should be sold by aggressive traders on any meaningful intraday bounce into obvious reference points. By reference points, I am referring to multi-day or multi-week downtrend lines, key moving averages and areas of prior low volume rejection.

Using Thursday's trading as an example, we saw demand begin to fade as buyers attempted to recapture the 10-day exponential moving average and 200-day simple moving average (roughly $110.80).

A quick review of the four major index ETFs reveals relatively little change over the past week. We're still faced with a situation where the IWM and Powershares QQQ Trust (QQQ) are in short-term downtrends, while the SPY and SPDR Dow Jones Industrial Average (DIA) are in horizontal consolidation, or balance. Given the proximity of the SPY and DIA to the top of their respective balance areas, my inclination is to either avoid them on the long side, or stalk them for shorts.

As far as the IWM and QQQ are concerned, I will continue to lean more aggressively short on those two ETFs (with added emphasis on the IWM) until a more convincing floor is found in the high-growth momentum stock universe.

Daily Chart of Major Indices

Over the course of the past two days, the SPY has traded remarkably well according to our premarket expectations and trade plan. Buyers defended the bottom of balance ($186 to $186.10) on Wednesday, and pulled their bids at the top of balance on Thursday ($189.05). As far as Friday's auction is concerned, I'll be looking for a moderately more choppy and rotational trade between $186.65 and $188.45. With the only chance of meaningful range extension coming into play as value migrates above $188.45, or beneath $186.65.

As a reminder, a sustained trade above $189.05 (a 15 or 30 minute bar close) encourages buyers to bid prices up toward $189.55 and onto to new all-time highs. While a sustained break of $186.05 would have me looking down toward $185.20 and $184.15.

5-Minute Volume Profile SPY

As stated above, the IWM is likely to remain under pressure until the beaten down momentum sector can find its footing. Stocks like FireEye (FEYE), Twitter (TWTR), Amazon (AMZN), Linkedin (LNKD) and Splunk (SPLK) need to find a bottom before anyone is going to hold the IWM for more than a few hours. As you review the volume profile below, pay close attention to the $108.90 level. Failure to hold that level on a 30 minute closing bar basis likely triggers another meaningful wave of selling down toward $108.25 and $107.71.

A sustained trade above $110.60 would give the bulls another shot at redemption. But as far as a specific level I'd need to see breached (and held through the close) to gain more confidence in the IWM, that would be closer to $112.15 to $112.25.

15-Minute Volume Profile IWM

 Additional Notes:

1. Transocean (RIG) gapped significantly higher to begin the day on Thursday, but the stock gave back those gains and more by the close of regular session trading. The bottom line is that the stock went from looking promising, to downright concerning. Given the morning's opening gap, I never even considered initiating a position. And after Thursday's massive reversal, I'm in no hurry to rush into the stock. l plan to watch how it trades around its 50-day simple moving average and circle back to the name in a few days. To be continued...

2. I mentioned Precision Castparts (PCP) several days ago as a stock with a bullish daily chart, but it too gave back all its early morning gains on Thursday. As you'll recall, I was looking for a move above $260 to indicate the bulls were stepping forward, and a push above $265 to solidify their dominant position. Unfortunately, PCP was flat rejected from $265 shortly after Thursday's open. Given how high the volume was on Thursday's bearish reversal, I'd opt to stand aside and wait for buyers to recapture %265 before revisiting any sort of bullish thesis.

Any trading or volume profile related questions can be posted in the comments section below, emailed to me at or posted to my twitter feed @ByrneRWS

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