Breakouts In Metals/mining & Clean Energy ETFs

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

Stocks concluded the week with a strong session of gains last Friday, though the intraday price action was a bit indecisive again. The major indices gapped higher on the open, drifted down to the flat line by mid-day, then rallied back to their highs in the afternoon. It was a pattern that repeated itself several times last week. The Nasdaq gained 1.9%, the S&P 500 1.4%, and the Dow Jones Industrial Average 1.0%. The small-cap Russell 2000 and S&P Midcap 400 indices motored higher by 1.9% and 1.2% respectively. All of the main stock market indexes finished at or near their intraday highs, another common occurrence as of late.

Higher turnover that would have confirmed the presence of institutional buying was the main factor missing from last Friday's rally. Total volume in the NYSE declined 13%, while volume in the Nasdaq was 8% lighter than the previous day's level. With five "distribution days" on the table over the past month, a bullish "accumulation day" would have helped to counteract the recent days of institutional selling. Nevertheless, last Friday's trading activity was still substantial. In both the NYSE and Nasdaq, total volume levels exceeded their 50-day averages. Market internals in the NYSE were the most solid we've seen in a while. Advancing volume exceeded declining volume by nearly 5 to 1. The Nasdaq ratio was positive by just 2 to 1.

After a steep correction down to its 200-day MA just two months ago, the S&P Metals and Mining SPDR (XME) has roared back to a new high. XME broke out to a new all-time high last Friday, after consolidating near its prior high throughout most of October. XME closed about 1.5 points above its breakout level, but a pullback to about half of last Friday's range would provide a low-risk buy point. The breakout is illustrated on the daily chart below:

Although other ETFs have also broken out to new highs after correcting below their 200-day MAs in August, one thing we like about XME is the base of consolidation it formed first. Many of the international ETFs, for example, have also surged back to new highs, but in a more parabolic fashion. As such, they are more likely to fall harder in the event of a broad market pullback. ETFs that breakout from a lengthy period of consolidation have a more solid base of support in the event of a pullback.

The PowerShares WilderHill Clean Energy Fund (PBW), which we profited from on last month's breakout above the 50-day MA and downtrend line, also broke out to a new high last Friday. Consolidating for nearly three weeks, PBW dipped below its 20-day EMA just once, then steadily pushed to a new high a few days later. The pullback to the 20-day EMA also coincided with support of its primary uptrend line off the August low. The gentle correction and subsequent breakout are annotated on the daily chart of PBW below:

Many of the stocks that comprise PBW are related to solar energy, a sector that has absolutely been on fire lately! One look at leading stocks like SunPower (SPWR), First Solar (FSLR), JA Solar Holdings (JASO), and Suntech Power Holdings (STP) confirms that statement is not just a corny pun. With the solar energy sector showing such relative strength, odds are good that PBW makes another leg higher from its current breakout. Unlike XME, PBW closed just a few cents above resistance of its prior high. Therefore, assuming it doesn't gap much on today's open, it is not too far extended for an entry near last Friday's close.

Both the S&P 500 and Dow Jones Industrials moved back above their 20-day EMAs last Friday. Although this is bullish, both indexes still have not fully absorbed the overhead supply from the broad-based October 19 sell-off. The same could be said of the Russell 2000 and S&P Midcap 400 indices. The Nasdaq Composite, however, is looking pretty good now, poised for a nice breakout above its three-week base of consolidation. Be aware that the markets may remain choppy and indecisive until Wednesday afternoon's announcement on economic policy from this week's highly anticipated meeting of the Federal Reserve Board.

Open ETF positions:

Long - UNG, TLT, TWM, DXD (half position)
Short - (none)

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.

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