The broad market concluded last week
with a choppy session of indecision that left the major indices modestly higher.
Stocks shook off morning weakness by rallying into mid-day, but
subsequently drifted lower throughout the afternoon. By day's end, both the S&P
500 and Dow Jones Industrial Average had advanced 0.2%, while the Nasdaq
Composite gained 0.4%. Small and mid-cap stocks showed relative weakness,
holding both the Russell 2000 and S&P Midcap 400 indices to unchanged levels.
Each of the major indices finished just above the middle of their intraday
ranges.
Overall volume levels failed to confirm Friday's reversal
attempt, as turnover fell in both exchanges. In the NYSE, total volume declined
by 6%, while volume in the Nasdaq was 13% lower than the previous day's level.
If volume in the Nasdaq would have risen, it would have largely invalidated last
Thursday's bearish "distribution day," but the index only recovered half of that
day's loss and did so on lower volume. Conversely, it's been more difficult to
determine what's happening beneath the surface in the NYSE because turnover has
been declining on both up and down days. In each of the past five trading
days, total volume in the NYSE has come in below its 50-day average level. One
thing for certain is that trends can reverse much more easily when in a period
of declining overall volume levels.
The Nasdaq is attempting to reverse its uptrend by forming a
"lower high" and "lower low," but the S&P still remains above its pivot and near
its six-year high. Rather than predicting which index will win the tug-of-war,
let's take a look at a few sector-specific ETFs that may offer short-term
trading opportunities in the coming week. First is the potential upside breakout
that is setting up in the PowerShares Pharmaceuticals (PJP | news | PowerRating | PR Charts ):
As you can see, PJP has been consolidating in a sideways range
for the past month. Throughout that period, it has pulled back after running the
18.40 area on four separate occasions, thereby creating a clear resistance
level. Each subsequent test of resistance increases the odds of an eventual
breakout, but also builds more upward momentum if the breakout eventually comes.
As such, one might consider buy stopping PJP about 10 cents over the horizontal
price resistance. If doing so, be sure to place a protective stop just below the
20-day moving average at 18.16 (or even tighter) in order to protect against a
false breakout. Note that PJP has a much more bullish pattern than the more
well-known Pharmaceutical HOLDR (PPH | news | PowerRating | PR Charts ). The iShares Pharmaceutical (IHE | news | PowerRating | PR Charts )
has a similar horizontal band of resistance as PJP, but its recent trading range
has been much looser.
We also continue to like the bullish consolidation in the Oil
Service HOLDR (OIH | news | PowerRating | PR Charts ), which has been trading in a narrow, sideways range
since breaking out eight sessions ago. Watch for a breakout above the $148.50
area:
On the downside, the ETFs with the weakest chart patterns are
generally in the technology arena. We're avoiding the semiconductor ETFs because
the $SOX index has been very choppy and erratic lately, but the Software Index
($GSO) may be setting up on the short side. Specifically, the iShares Software
Index (IGV | news | PowerRating | PR Charts ) closed last week below its 50-day moving average for the first
time since July 25. Looking at the chart below, notice how Friday's reversal
attempt failed, causing IGV to finish near the previous day's low. We have also
illustrated the trend channel for the short-term downtrend that has become
established. If the Nasdaq heads south this week, except IGV and the other
software ETFs to be among the downside leaders:
Expect trading to be relatively subdued ahead of tomorrow's
FOMC meeting on interest rates. At 2:15 pm EST, the Feds will announce whether
or not they will make any changes to the Federal Funds Rate. As always, most
institutional traders are likely to remain on the sidelines until after the
announcement. With regard to the broad market, we shifted out of "sitting on
hands" mode to "dip a toe in the water" on the short side on December 7, but we
do not yet have enough confirmation to aggressively start entering additional
broad-based ETFs. Perhaps resolution of the market's mixed signals will come
after tomorrow's Fed announcement, so be prepared for a sharp move in either
direction.
Open ETF positions:
Long QID, USO, short RKH (regular subscribers to
The Wagner Daily
receive detailed stop and target prices on open positions and detailed setup
information on new ETF trade entry prices. Intraday e-mail alerts are also sent
as needed.)
Deron Wagner is the head trader
of Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (morpheustrading.com),
which he launched in 2001. Wagner appears on his best-selling video, Sector
Trading Strategies (Marketplace Books, June 2002), and is co-author of both The
Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader
(McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and
Yahoo! FinanceVision. He is also a frequent guest speaker at various trading and
financial conferences around the world. For a free trial to the full version of
The Wagner Daily or to learn about Deron's other services, visit
morpheustrading.com or send an e-mail to
deron@morpheustrading.com .
