2 Hot ETF Summer Buys

07/23/2013 7:00 am EST

Focus: ETFs

Deron Wagner

Founder and Head Portfolio Manager, Morpheus Trading Group

Pro trader, Deron Wagner of Morpheus Trading Group, shows two low-risk ETF swing trades setting up now.

We have been holding Guggenheim Solar ETF (TAN) as an intermediate-term swing trade since July 2, when we bought in anticipation of another breakout to new highs. This momentum trade has been working out well so far, as this ETF swing trade is presently showing an unrealized share price gain of 13.8% (based on our July 2 entry price of $24.20).

Over the past four days, TAN has been consolidating a tight, sideways range near its all-time high. This is healthy price action and has led to the formation of a “bull flag” type pattern on its daily chart. This is shown on the chart of TAN below:

chart
Click to Enlarge

Because of the bullish pattern that has formed, odds now favor another breakout to new highs for TAN in the coming days. Since we presently have only 50% of our maximum share size in this trade, we will be adding an additional 25% exposure if the ETF rallies above the July 19 high.

Traders who missed our original entry point for any reason may now also consider establishing a new position in TAN, based on our same entry and stop price criteria. However, in this case, no more than 25% to 50% of maximum position size would be recommended because the average entry price on this trade would be more than 13% above our original July 2 entry price.

Another ETF we are already holding is Market Vectors Semiconductor ETF (SMH), which we bought one week ago when it broke out above resistance of its prior highs. Since then, the ETF has pulled back and is trading slightly below our entry price, but the current retracement from the highs now provides a low-risk buy entry point for traders who missed our initial entry point. The pullback is also an ideal level to add additional shares for traders who are looking to increase their position size:

chart
Click to Enlarge

Notice that SMH gapped down last Friday (July 19), but found support at its 50-day moving average, which neatly coincided with the intraday low of the session. Furthermore, the ETF formed a bullish “hammer” candlestick after bouncing off key support of its 50-day MA.

Because of the hammer candlestick that coincided with a pullback to the 50-day MA, the actual entry point to establish a new position in SMH (or to add to existing shares) is just above the July 19 high of $38.58. A protective stop could be placed just below major support of the June 24 swing low of $36.08. Alternatively, momentum traders with a shorter-term trading timeframe could place a tight stop just below the July 19 low, which would put SMH back below its 50-day MA if the stop is triggered.

We are already at 75% maximum position size with SMH, so we are NOT looking to add additional shares at this time. Nevertheless, we wanted to give you a heads-up to this low-risk buying opportunity in case you missed our original entry or are too light in share size.

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

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