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NOTE: Please click on the charts below to enlarge them if they do not appear clearly.

The bulls and bears battled it out in a tug-of-war yesterday, as stocks indecisively rolled over peaks and valleys throughout a rather wide-range day.  But by the closing bell, the bulls had the upper hand. The major indices gapped sharply lower on the open, recovered in the morning, sold off to new intraday lows at mid-day, then reversed again into the close.  The benchmark S&P 500, down 1.5% at its mid-day low, finished with a respectable gain of 0.4%.  The Dow Jones Industrial Average advanced 0.3% and the Nasdaq Composite climbed 0.5%.  The small-cap Russell 2000 and S&P Midcap 400 indices lagged behind again, gaining just 0.2% and 0.1% respectively.  Each of the main stock market indexes closed near its intraday high for a change.

The most positive part of yesterday's session was that higher turnover matched the bullish closing action.  Total volume in the NYSE increased 14%, while volume in the Nasdaq surged 28% above the previous day's level.  In both exchanges, trading exceeded 50-day average levels by a significant margin.  The heavier trading activity tells us that institutions were finally toying with the long side of the market.  Advancing volume was roughly on par with declining volume in both the NYSE and Nasdaq.

Throughout recent months, the financial sector has been a leading indicator of the direction of the broad market.  This still appears to be the case, as a late-day bullish reversal in both the Bank Index ($BKX) and Amex Securities Broker-Dealer Index ($XBD) yesterday afternoon was the reason the main stock market indexes rallied into the close as well.  Volume in most of the financial ETFs also spiked higher yesterday, hinting at possible capitulation.  Because the financials have been beaten down so badly, the sector could easily bounce significantly higher in the near-term.  We point out the likely bounce in the financial sector only because it could spark a tradeable, countertrend bounce in the broad market, not because we advocate trying to catch a falling knife.  With the financial stocks at multi-year lows, there is a ton of overhead supply, so the sector is best left alone, at least until the various financials ETFs start breaking out above their 20-day moving averages. 

If financials manage to lead the stock market higher in the near-term, long entries should be considered only in ETFs that have recently shown relative strength to the broad market.  The Biotech HOLDR (BBH) is one such ETF.  While the major indices were getting slaughtered last month, BBH simply held in a sideways range.  BBH closed the month of June with a 1.8% gain, which compared quite favorably to the 8.4% loss in the S&P 500.  When ETFs exhibit relative strength by trading sideways as the major indices are moving lower, they are typically the first ETFs to surge higher when the broad market eventually bounces.  Last month's relative strength to the broad market is the reason BBH rallied 2.1% yesterday, compared to just the 0.4% gain in the S&P 500.  If the major indices continue higher in the near-term, BBH should continue to outperform their gains.  On the weekly chart below, notice how BBH just broke out above an eight-month downtrend line:

There are several other biotech ETFs to consider, but BBH is clearly showing the most relative strength.  This is because the large-cap biotech stocks rallied the most yesterday, and BBH is primarily comprised of large-caps.  We're stalking BBH for potential buy entry today, and regular subscribers to The Wagner Daily should note our detailed trigger, stop, and target prices for the setup below.

In addition to biotech, the brethren pharmaceutical sector also fared well against the broad market last month.  Unlike BBH, the Pharmaceutical HOLDR (PPH) is sitting near its 52-week low, but it held in a sideways range and refused to move lower alongside of the S&P 500 over the past several weeks.  As such, PPH may also present a low-risk buying opportunity, just because of its relative strength.  However, its daily and weekly chart patterns are certainly more bearish than BBH.

As we've been saying for the past few days, new short sale entries at current levels do not carry a positive risk/reward ratio. Even though Market Vectors Agribusiness (MOO) has begun to show relative weakness and close lower yesterday, we avoided selling it short specifically because it is now out of sync with the broad market, which is poised to bounce in the near-term.  Nevertheless, if the broad market rally attempt fizzles out quickly, agriculture ETFs may lead the way lower because they appear to have entered correction mode.  The Market Vectors Steel (SLX) has also begun to show relative weakness and may become a downside leader in the short to intermediate-term.  We are currently short SLX, and showing an unrealized gain of more than 3 points.  If it can manage to show enough weakness as the broad market bounces, expect it to make another leg lower in the near future. 

Even though we now anticipate a near-term rally in the broad market, it would be foolish to expect anything more than a tradeable, counter-trend bounce.  There is an abundance of overhead supply, along with resistance of even the very short-term 10-day moving averages.  If the major indices suddenly get their mojo back and start to move back above their 20-day exponential moving averages, we'll re-assess the technical situation.  But until then, we are viewing any new entries on the long side as strictly momentum-driven bounces that we are prepared to exit quickly.

Open ETF positions:


Long - (none)

Short - SLX




NOTE: Regular subscribers to The Wagner Daily receive daily updates on the open positions above, as well as new ETF trade setups, including trigger, stop, and target prices.  Intraday Trade Alerts are also sent via e-mail and/or mobile phone text message on as-needed basis.





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.  Wagner is currently working on this third book, scheduled for publication in early 2008.





For a free trial to the full version of The Wagner Daily above, which includes detailed ETF trade setups and daily position updates, or to learn about our other newsletters, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com.

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