Nice Consolidation In The Biotech Index ($btk)

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

Yesterday was a bit of a snoozer, as the S&P 500 opened flat, then lethargically oscillated in just a four-point range throughout the entire session. Still, the index logged a gain of 0.3%. As we have become accustomed to over the past month, the Dow Jones Industrials also rallied again, this time advancing 0.4%. A pullback in the Internet sector weighed on the Nasdaq Composite, which slipped 0.1% and closed near the bottom of its intraday range. The small-cap Russell 2000 also lost 0.1%, while the S&P Midcap 400 was unchanged.

Substantially lower volume in the markets helped explain the lackadaisical price action. Total volume in the NYSE was 15% lighter than the previous day's level. Turnover in the Nasdaq receded 25%. In both exchanges, it was the lightest volume day in more than a month. Like the closing prices of the major stock market indexes, market internals were mixed. In the NYSE, advancing volume exceeded declining volume by a margin of 3 to 2. The Nasdaq, however, was negative by nearly the same ratio.

Thanks to merger and acquisition activity, Metals and Mining was the only major sector to gain more than one percent yesterday. The ETF that most closely tracks the sector, the StreetTRACKS Metals and Mining (XME), rallied 1.5% and finished at a new record high. As you can see on the chart below, XME bounced perfectly off support of its 20-day exponential moving average last week. As long as it holds above $64, XME should see another leg up in the coming weeks:

The Biotech Index ($BTK) has been consolidating nicely over the past two weeks and is another sector that should move higher in the coming weeks. The index dipped with the rest of the broad market on April 30, but the correction was orderly and it recovered quickly. A rally above the hourly downtrend line (illustrated below) should trigger a wave of buying that leads to a new multi-year high in the $BTK index:

As we illustrated with a "percentage change" chart a few weeks ago, the First Trust Biotech (FBT) and iShares Nasdaq Biotech (IBB) have been showing more relative strength than the popular Biotech HOLDR (BBH). Keep that in mind if you are buy any Biotech ETFs when the index resumes its uptrend. Always buy the leading ETF within a sector, not the laggard.

On the downside, retail remains the only sector that is showing significant weakness. The Retail Index ($RLX) is still consolidating near its April 30 low, stuck beneath resistance of its 20-day EMA. Just one retracement in the broad market should push the index back below its 50-day moving average.

Yesterday's low-volume session did little to change the technical picture of the broad market. The Dow, and to a lesser extent the S&P 500, continued to chug along at the upper channel of its primary uptrend that we illustrated in yesterday's newsletter. The Nasdaq declined modestly, but its loss was inconsequential because it did so on much lower than average volume. The light volatility and low turnover in the stock market could likely be attributed to the upcoming Fed meeting. This Wednesday afternoon, the Federal Reserve Board will announce its latest intentions on interest rates and economic policy. Understandably, institutional traders are probably going to remain on the sidelines until then. Given the positive expectations already built into the market, we expect the market to react to the Fed announcement with a lot of volatility and erratic price action. Consider waiting until the market has digested the upcoming Fed commentary before entering any new positions you may be stalking.

Open ETF positions:


Long GDX, short XRT (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 .

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