Biotech Strength Follows Through. . .

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

Stocks gapped open higher for the second straight day, but this time the gains remained intact. The major indices built on their opening advance, grinding higher throughout the day, before finishing near their intraday highs. Both the S&P 500 and Dow Jones Industrial Average gained 1.4%, while the Nasdaq Composite climbed 1.5%. The small-cap Russell 2000 and S&P Midcap 400 indices were higher by 1.6% and 1.2% respectively. Despite erratic volatility in the final thirty minutes of trading, the broad market closed strong for the first time in weeks.

Unfortunately for the bulls, yesterday's rally lacked the confirmation of higher turnover. The main ingredient of bullish trend reversal attempts, overall volume levels fell in both exchanges. Total volume in the NYSE registered 3% below the previous day's level, as volume in the Nasdaq ticked 1% lower. Although volume eased only slightly, it was a sign that institutions are still quite complacent. Most likely, mutual funds, hedge funds, and other institutional investors are in no hurry to jump back in the markets until they see the Fed's next move on September 18. Despite lower turnover, market internals were solid. In both the NYSE and Nasdaq, advancing volume exceeded declining volume by a ratio of approximately 5 to 1.

Zooming 2.3% higher yesterday, the Biotech Index ($BTK) was one of the day's top performing industry sectors. After a brief pullback to support on Monday, the iShares Nasdaq Biotech (IBB) similarly gained 2.1% yesterday. The successful test of support is annotated by the pink ellipse on the daily chart of IBB below:

If IBB moves just a bit higher and clears the $82 area, it will have popped above horizontal price resistance from May of this year. That should enable IBB to subsequently test resistance of its 52-week high shortly thereafter. Overall, IBB is acting well since breaking out above its downtrend line early last week. Our IBB position is presently showing an unrealized gain of more than 2 points since our August 31 long entry, but our price target remains about 1.5 points higher. We plan to sell IBB into strength as it tests resistance of its 52-week high.

Since breaking out above its 50-day MA on August 31, the Oil Service HOLDR (OIH) is another ETF that has been acting well. On September 10, OIH pulled back to test support of its breakout, then formed a bullish "hammer" candlestick pattern into the close. It followed through with a gain yesterday, and is now poised to break out above its short-term consolidation. Take a look:

Now that the breakout above the 50-day MA appears to be holding, we may buy OIH on a rally above its September 6 high of $185.60. Such a move should enable OIH to carry on to a new record high. Because the current chart pattern resembles a "cup and handle" pattern, a rally above the high of the consolidation is more important than waiting for a breakout above the July high.

In yesterday's commentary, we illustrated resistance of the hourly downtrend lines for the S&P, Dow, and Nasdaq. As one might have guessed, yesterday's substantial gains enabled all three indexes to close above those trendlines. As you can see, the S&P 500 also moved back above its 200-day MA:

The breakout above the hourly downtrend lines in all three main indexes is bullish in the short-term, but the intermediate-term picture remains pretty fuzzy. The S&P 500, for example is now trapped between a rock and a hard place. Notice how the 200-day MA continues to flex its muscles by providing support, but the closely watched 50-day MA looms just overhead. The first test of the 50-day MA on September 4 was instantly met by selling that led to the current short-term downtrend. Further, the 50-day MA now converges with upper channel resistance of the intermediate-term downtrend (the red descending line). Clearly, it will take some work for the S&P 500 to absorb that overhead supply. The power of institutional buying could certainly do it, but it should prove difficult to move much higher if overall volume remains stagnant. For that reason, continue to pay close attention to not only the market's price action, but the changes in turnover as well.

Open ETF positions:


Long - IBB, LQD, SDS, DXD

Short - (none, but SDS and DXD are both bearish positions)




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 e-mail alerts are also sent 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.

1 Comments:

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posted by fnqi iumhqbkgt @ 11/17/2007 06:56AM

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