Which Technical Signals Precede the Best ETF Breakouts

01/18/2013 6:00 am EST

Focus: ETFs

Deron Wagner

Founder and Head Portfolio Manager, Morpheus Trading Group

Pro trader, Deron Wagner of Morpheus Trading Group, shares the details of the set-up that provided the entry point into one of his most recent ETF swing trades.

On December 31, 2012, we bought the iShares MSCI All Peru Capped Index ETF (EPU) as a short- to intermediate-term swing trade entry in The Wagner DailyETF and stock trading report. Although the position is still open, the ETF is presently showing an unrealized gain of 4% since our initial buy entry on the last day of 2012. For ETFs, which are typically less volatile than leading individual stocks, that’s a solid percentage move over a two-week period. In this post, we take you on an educational walk-through of the technical trading factors that preceded our recent breakout buy entry.

For starters, take a look at the annotated daily chart of EPU below, which highlights our exact buy entry point, as well as our current target price on the EPU:

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As the chart above illustrates, we bought EPU on December 31, as the ETF broke out above resistance of the high of its trading range ($45.62). Since then, the price has been pushing steadily higher, and our “official” upside target is now the $49.40 area. Now that you’ve seen the bullish price action subsequent to the breakout, let’s take a more important look at the technical trading criteria that preceded the breakout, which then prompted us to buy the ETF for swing trade entry.

Generally speaking, the price action preceding the late December breakout in EPU is a good example of the technical factors we look for when stalking an ETF or stock that is trading in a bullish consolidation pattern. Once a clear base of support has formed, we then look for the formation of a “higher swing low” to develop within the base, which lets us know that bullish momentum is on our side. Approximately 90% or more of our ETF and stock breakout entries will have some sort of a “higher swing low” in place prior to our buy entry, and this setup was no different:

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After the higher swing low was established in the first half of December, the next step was to look for a tight then look for a tighter, shorter-term price range to develop just below resistance of the highs of the base. Notice on the chart above that this tight price range developed in the last two weeks of December, as EPU chopped around just below the $45.50 level. Such price action indicated that a momentum-based breakout above the highs of the trading range was likely to occur in the coming days, so we added EPU to our “official” Wagner Daily trade watch list as a potential buy entry, just in time to catch the December 31 breakout.

If EPU hits our target price at the $49.40 area, we will automatically sell into strength to lock in a sizeable gain on the swing trade. However, in the event price action suddenly starts to weaken along the way, we will simply trail our protective stop tighter to lock in gains in the event of an unexpected bearish reversal. As always, we will keep regular subscribers notified of any changes to management of this ETF trade.

By Deron Wagner, Founder and Head Trader, Morpheus Trading Group

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