Stocks roared back from their losses of the past several sessions yesterday (August 5), enabling the major indices to finish right at resistance of last month's highs. After gapping higher on the open, the broad market grinded higher throughout the first half of the day, then continued to build on its gains after the 2:15 pm Fed announcement. As widely anticipated, the Federal Open Market Committee (FOMC) not only left interest rates unchanged, but also avoided hinting at future rate increases. The stock market's knee-jerk reaction was quite positive. The Nasdaq Composite rocketed 2.8% higher, while the S&P 500 and Dow Jones Industrial Average scored identical gains of 2.9%. The small-cap Russell 2000 and S&P Midcap 400 indices climbed 2.4% and 2.1% respectively. Breaking the recent pattern of choppy and indecisive trading, it was also refreshing that stocks trended smoothly intraday for the first time since July 29. All the main stock market indexes finished at their best levels of the day.
Confirming yesterday's massive gains was a sharp spike in volume across the board. Total volume in the NYSE swelled 13% above the previous day's level, while volume in the Nasdaq similarly ticked 19% higher. Although the S&P 500 logged a bearish "distribution day" by declining on higher volume on August 4, it's quite positive that stocks followed up Monday's bout of institutional selling with a powerful round of institutional buying. It was the fifth such "accumulation day" within the past two weeks. Since the broad market formed its intermediate-term bottom in the middle of last month, there have been six "accumulation days (higher volume buying)," and just one "distribution day (higher volume selling)." Without even looking at a single chart pattern, this ratio tells us the bulls have clearly had the upper hand recently.
Ten of the twenty-five major industry sectors we monitor on a daily basis bagged impressive gains of more than three percent yesterday. However, very few of these sectors have nice daily or weekly chart patterns that would excite us to enter new positions. Most industries, including semiconductors ($SOX), are still trading below resistance of their intermediate and long-term downtrend lines. In this situation, one would have no reason to expect a lot of upside potential until the sector breaks out and starts to absorb some overhead supply. Other industries, such as banking ($BKX) and transportation ($DJT), are stuck in choppy, sideways trading ranges that we don't want to touch.
Considering this situation, what sector ETFs should an astute trader look to buy if bullish momentum continues in the near to intermediate-term? In addition to the biotechnology ETFs, which we've been discussing regularly for the past several weeks, we're now beginning to see relative strength and breakouts in the pharmaceutical and healthcare industries, both of which are "sister sectors" to biotechnology. Let's take a look at a few ETFs in those sectors. First, check out the daily chart of iShares U.S. Healthcare Sector Index (IYH), comprised of 139 different companies in the healthcare, biotech, and medical devices sectors:
As the dashed horizontal line indicates, IYH just broke out above a key band of price resistance. The breakout also coincided with a breakout above its 200-day moving average (the orange line). Much higher than average volume over the past two days confirms the institutional buying interest. Per Intraday Trade Alert to subscribers of The Wagner Daily, we bought IYH when it rallied above its 200-day MA yesterday. The S&P Healthcare SPDR (XLV) has a similar chart pattern, but did not exhibit a similar volume surge this week.
Another related ETF that looks good right now is iShares U.S. Medical Devices (IHI). This ETF broke out above a similar band of horizontal price resistance, but is already well above its 200-day MA. Furthermore, it is less than 2% below its all-time high. On the daily chart below, notice how yesterday's volume surged to more than 4 times its average daily level on the breakout:
Even the lackluster Pharmaceutical HOLDR (PPH), comprised primarily of large-cap, old-school pharmaceutical companies, is showing signs of life. It's still trading near multi-year lows, but is about to break out above resistance as well. We prefer IYH or IHI because their chart patterns are better and they have some more dynamic, faster-growing companies in their portfolios. High-growth companies typically lead a sector that is showing relative strength. But regardless of which ETF you prefer, it's clearly evident that the entire healthcare arena is under institutional accumulation. If buying anything right now, strongly consider having at least a few healthcare ETFs (biotech, pharmaceutical, or medical devices) in your portfolio. In addition to our new position in IYH, we also remain positioned in the S&P Biotech SPDR (XBI). Biotech-specific ETFs, including tickers such as XBI, BBH, IBB and PBE, are the strongest of the healthcare-related ETFs.
As for the broad market, most of the major indices closed at a pivotal area of resistance. Last week, the S&P 500 and Nasdaq Composite both tested resistance of their "swing highs" that were set on July 23. They backed off immediately after doing so, resulting in the July 31 - August 4 pullback. Yesterday, however, both indexes fully recovered the preceding three days of losses to close right at last week's highs. Since this is the second test of their "swing highs" in less than a week, we think there are pretty decent odds the major indices will break out to new intermediate-term highs within the next several days. The pivotal levels of "swing high" resistance to watch are: S&P 500 - 1,291, Nasdaq Composite - 2,353, Dow Jones Industrial Average - 11,698. If the major indices close firmly above these levels, we could see a strong burst of upside momentum in the near-term. Although the long-term trends are still pointing down, let's take advantage of strength from the stock market's counter-trend bounce, which is all we can call it right now, while it lasts.
If you wish to learn about Morpheus Trading Group's ETF trade entries on the same day they occur, sign up for a free trial to The Wagner Daily or other MTG services by clicking here (limit one per household). Also, remember that all previously published issues of both The Wagner Daily and The Wagner Weekly are available in the MTG archives. If you are new to our services or wish to broaden your knowledge of ETF trading or our general trading style, we recommend you browse the archives because it is educational and free! Click here to visit the Wagner Daily archives or here to visit the Wagner Weekly archives.
In this column, MTG presents you with a FREE, actual trade setup that we are stalking for entry at some point during the week. Note that, unlike the daily guidance that regular Stalk Sheet subscribers receive, this free Stalk of the Week does not take into account overall broad market conditions that can easily affect the trade over the next several days. This week's trade setup is:
Click to receive your free 1-month trial to The MTG Stalk Sheet so that you can receive an average of one to three trade ideas such as this one on a daily basis (limit one free trial per household). Subscribers are always provided with detailed entry, stop, and target prices for each trade, and intraday e-mail alerts are sent as needed.
Below is the weekly commentary that accompanied the most recent ETF Trend Tracker, e-mailed to subscribers last weekend. The Morpheus ETF Trend Tracker, a perfect supplement to the ETF Roundup guide, is a comprehensive table of Exchange Traded Funds (ETFs) designed for informed investors and longer-term traders who prefer to hold their ETF positions for a few weeks to several months at a time. Based exclusively on a weekly analysis of trendlines on the daily and weekly charts, the ETF Trend Tracker provides subscribers with a thorough snapshot of the primary trend direction of ETFs in every category from broad-based to industry sector to international. This information is e-mailed to subscribers weekly, in a user-friendly format that groups ETFs based on the direction of their primary trends.
Commentary:Last week was another volatile session, but most of the Market Segment ETFs were nearly unchanged. Their intermediate-term chart patterns have generated a combination of "swing highs" and "swing lows," which makes stop placement more clear. In this week's ETF Trend Tracker, you will see many stops have been updated (just look for the rows shaded in pink color).
Several ETFs are now approaching trend reversal points. To be on top of the trend reversals mid-week, it is compulsory to make a watch list of ALL ETF tickers on the report, using the price listed in the Reversal Stop (S2) column, then set price alerts with your online brokerage firm. By doing so, you will instantly be aware of the moment an ETF hits its Reversal Stop. For ETFs currently on the "descending trend" list, the Reversal Stop (S2) is the point at which the primary trend direction will reverse. Once triggered, the ETF is moved to the "ascending trend" list, and the prior Reversal Stop (S2) price becomes the new Triggered Price for in the ascending trend. In an actual trade scenario, a "Buy Stop" could be set, using the S2 price, of an ETF presently in the "descending trend" list. If your buy stop triggers, you would automatically be entering the beginning of the new ascending trend. Annotated charts (found by clicking on any ticker symbol) enable you to determine which ETFs may have the most favorable patterns after the reversal.
Biotechs (BBH) continued to track higher, but finally pulled back into the end of the week. Several Industries consolidated and had mixed results. Ending the week on a sour note was Utilities (XLU), which dipped sharply and was the weakest performing sector. Also dragging lower is the Commodity Index (DBC). Natural Gas (UNG) has stopped its sharp decline, and is attempting to put in a counter-trend bounce off its low.
The fixed income (bond) ETFs ended the trading session slightly higher.
Australia (EWA) continued to move south, and ended at the lows of the week. Japan (EWJ) reversed to the "descending trend" list. Russia (RSX) posted new lows again. Stops on short positions (the "descending trend" list) have been moved aggressively tighter to lock in healthy gains.
Alert of imminent reversal to the upside:Click to receive your free 1-month trial to the ETF Trend Tracker (limit one free trial per household), which will be e-mailed to you every week, along with intra-week updates on an as-needed basis.
Last month, Morpheus Trading Group's Founder and Portfolio Manager, Deron Wagner, presented a one-hour workshop on his strategy of relative strength ETF trading at the Los Angeles Traders Expo. If you were unable to attend, but really wanted to, you're in luck! Wagner's entire one-hour presentation was captured live on video, and is now available for your viewing pleasure as a webcast. The best part is that viewing it is completely free!
To view the complimentary webcast, click here, then click on the link, on the right side of the page, titled "Relative Strength Sector Trading With ETFs." Note that you first need to register with MoneyShow.com in order to view the video, but it is free to do so. Just look for the link on top of the page if not already a registered member.
If you enjoy the webcast and would like to catch Wagner at his next live workshop, mark your calendar for the upcoming Las Vegas Traders Expo, scheduled to be held from November 19 - 22, 2008. In the meantime, be sure to sign up for a free 1-month trial to his daily ETF newsletter, The Wagner Daily, or any other service of Morpheus Trading Group, if you have not already had one within the past year.